Self-Regulatory Organizations; New York Stock Exchange LLC; Order Approving Proposed Rule Change Amending the Eighth Amended and Restated Operating Agreement of the Exchange To Establish a Regulatory Oversight Committee as a Committee of the Board of Directors of the Exchange and Amending Other Rules of the Exchange, 59837-59843 [2015-24971]
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Federal Register / Vol. 80, No. 191 / Friday, October 2, 2015 / Notices
contribute to the public price discovery
process.
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.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The Exchange has filed the proposed
rule change pursuant to Section
19(b)(3)(A)(iii) of the Act 9 and Rule
19b–4(f)(6) thereunder.10 Because the
proposed rule change does not: (i)
Significantly affect the protection of
investors or the public interest; (ii)
impose any significant burden on
competition; and (iii) become operative
for 30 days from the date on which it
was filed, or such shorter time as the
Commission may designate, if
consistent with the protection of
investors and the public interest, the
proposed rule change has become
effective pursuant to Section 19(b)(3)(A)
of the Act 11 and Rule 19b–4(f)(6)
thereunder.12
A proposed rule change filed under
Rule 19b–4(f)(6) 13 normally does not
become operative prior to 30 days after
the date of the filing. However, pursuant
to Rule 19b–4(f)(6)(iii),14 the
Commission may designate a shorter
time if such action is consistent with the
protection of investors and the public
interest. The Exchange has asked the
Commission to waive the 30-day
operative delay so that the proposed
rule change may become operative
before the current expiration of the pilot
period. The Exchange stated that an
immediate operative date would be
consistent with the protection of
investors and the public interest
because the pilot period is set to expire
on September 30, 2015, and a waiver
would permit the beneficial aspects of
the Program to continue uninterrupted.
The Commission believes that waiving
the 30-day operative delay is consistent
with the protection of investors and the
9 15
U.S.C. 78s(b)(3)(A)(iii).
CFR 240.19b–4(f)(6).
11 15 U.S.C. 78s(b)(3)(A).
12 17 CFR 240.19b–4(f)(6). In addition, Rule 19b–
4(f)(6)(iii) requires the Exchange to give the
Commission written notice of the Exchange’s intent
to file the proposed rule change, along with a brief
description and text of 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 satisfied this requirement.
13 17 CFR 240.19b–4(f)(6).
14 17 CFR 240.19b–4(f)(6)(iii).
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10 17
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public interest because such waiver
would allow the pilot period to
continue uninterrupted after its current
expiration date of September 30, 2015,
thereby avoiding any potential investor
confusion that could result from
temporary interruption in the pilot
program. For this reason, the
Commission hereby waives the 30-day
operative delay and designates the
proposal operative upon filing.15
At any time within 60 days of the
filing of the proposed rule change, the
Commission summarily may
temporarily suspend 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. If the
Commission takes such action, the
Commission shall institute proceedings
to determine whether the proposed rule
change should be approved or
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 email to rule-comments@
sec.gov. Please include File Number SR–
NYSEMKT–2015–69 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–NYSEMKT–2015–69. This
file number should be included on the
subject line if email 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
15 For purposes only of waiving the 30-day
operative delay, 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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59837
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 Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549 on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such
filing also will be available for
inspection and copying at the principal
offices 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–
NYSEMKT–2015–69, and should be
submitted on or before October 23,
2015.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.16
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015–24968 Filed 10–1–15; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–75991; File No. SR–NYSE–
2015–27]
Self-Regulatory Organizations; New
York Stock Exchange LLC; Order
Approving Proposed Rule Change
Amending the Eighth Amended and
Restated Operating Agreement of the
Exchange To Establish a Regulatory
Oversight Committee as a Committee
of the Board of Directors of the
Exchange and Amending Other Rules
of the Exchange
September 28, 2015.
I. Introduction
On June 12, 2015, New York Stock
Exchange LLC (‘‘NYSE’’ or ‘‘Exchange’’)
filed with the Securities and Exchange
Commission (‘‘Commission’’), pursuant
to Section 19(b)(1) 1 of the Securities
Exchange Act of 1934 (‘‘Act’’),2 and
Rule 19b–4 thereunder,3 a proposed rule
change to amend the Eighth Amended
and Restated Operating Agreement
(‘‘Operating Agreement’’) of the
Exchange and to amend other rules of
the Exchange, as described below. The
16 17
CFR 200.30–3(a)(12), (59).
U.S.C. 78s(b)(1).
2 15 U.S.C. 78a.
3 17 CFR 240.19b–4.
1 15
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Federal Register / Vol. 80, No. 191 / Friday, October 2, 2015 / Notices
proposed rule change was published for
comment in the Federal Register on
June 30, 2015.4 The Commission
received one comment letter on the
proposed rule change 5 and a response
to the comment letter from the
Exchange.6 On August 11, 2015, the
Commission extended the time period
in which to approve the proposed rule
change, disapprove the proposed rule
change, or institute proceedings to
determine whether to disapprove the
proposed rule change, to September 28,
2015.7 This order approves the
proposed rule change.
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II. Description of the Proposal
NYSE proposes to: (i) Amend the
Exchange’s Operating Agreement to
establish a Regulatory Oversight
Committee (‘‘ROC’’) as a committee of
the Exchange’s Board of Directors
(‘‘Board’’) and make conforming
amendments to Exchange Rules 1, 46,
46A, and 497; (ii) terminate the
Delegation Agreement (‘‘Delegation
Agreement’’) among the Exchange,
NYSE Market (DE), Inc. (‘‘NYSE Market
(DE)’’), and NYSE Regulation, Inc.
(‘‘NYSE Regulation’’), delete Exchange
Rule 20, which sets forth the terms of
the delegation, and make conforming
amendments to Section 4.05 of the
Operating Agreement and Exchange
Rules 0, 1, 22, 36, 37, 46, 48, 49, 54, 70,
103, 103A, 103B, 104, 422 476A, and
497; (iii) remove from the Exchange
Rules certain organizational documents
of NYSE Market (DE) and NYSE
Regulation in connection with the
proposed termination of the Delegation
Agreement; (iv) amend the Operating
Agreement to establish a Director
Candidate Recommendation Committee
(‘‘DCRC’’) as a committee of the Board
and set forth the process by which NonAffiliated Director Candidates are
named to the new DCRC; (v) amend the
Operating Agreement to establish a
Committee for Review (‘‘CFR’’) as a
subcommittee of the ROC and make
conforming changes to Exchange Rules
308, 475, 476, 476A, and 9310; and (vi)
replace references to the Chief Executive
Officer of NYSE Regulation in Exchange
4 See Securities Exchange Act Release No. 75288
(June 24, 2015), 80 FR 37316 (‘‘Notice’’).
5 See letter from J. Robert Brown, Jr., Professor of
Law & Director, Corporate & Commercial Law
Program, University of Denver Sturm College of
Law, to Brent J. Fields, Secretary, Commission,
dated September 8, 2015 and received by the
Commission on September 21, 2015 (‘‘Professor
Brown Letter’’).
6 See letter from Martha Redding, Senior Counsel
and Assistant Secretary, NYSE, to Brent J. Fields,
Secretary, Commission, dated September 24, 2015
and received by the Commission on September 24,
2015 (‘‘NYSE Response Letter’’).
7 See Securities Exchange Act Release No. 75659,
80 FR 49285 (August 17, 2015).
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Rules 48, 49, and 89 with references to
the Chief Regulatory Officer of the
Exchange.
A. Establishing a ROC and Making
Conforming Amendments to Exchange
Rules
The Exchange proposes to add
subsection (ii) to Section 2.03(h) of the
Operating Agreement to establish a ROC
and to delineate its composition and
functions. The Exchange states that new
Section 2.03(h)(ii) of the Operating
Agreement would be substantially
similar to the recently approved changes
by the Exchange’s affiliates, NYSE Arca,
Inc. (‘‘NYSE Arca’’) and NYSE MKT
LLC (‘‘NYSE MKT’’), to establish ROCs,8
as well as Article III, Section 5(c) of the
By-Laws of the NASDAQ Stock Market
LLC (‘‘NASDAQ’’) (‘‘NASDAQ ByLaws’’).9 The ROC would be appointed
annually and would have the following
responsibilities:
• Oversee the Exchange’s regulatory
and self-regulatory organization
responsibilities and evaluate the
adequacy and effectiveness of the
Exchange’s regulatory and selfregulatory organization responsibilities;
• assess the Exchange’s regulatory
performance; and
• advise and make recommendations
to the Board or other committees of the
Board about the Exchange’s regulatory
compliance, effectiveness and plans.10
In furtherance of these functions, the
Exchange proposes that the ROC shall
have the authority and obligation to: (i)
Review the regulatory budget of the
Exchange and specifically inquire into
the adequacy of resources available in
the budget for regulatory activities; (ii)
meet regularly with the Chief Regulatory
Officer (‘‘CRO’’) in executive session;
(iii) in consultation with the Exchange’s
Chief Executive Officer, establish the
goals, assess the performance, and
recommend the CRO’s compensation;
and (iv) keep the Board informed with
respect to the foregoing matters.
With respect to the ROC’s
composition, Section 2.03(h)(ii) would
provide that the ROC shall consist of at
least three members, each of whom shall
be a Director of the Exchange who
8 See Securities Exchange Act Release Nos. 75148
(June 11, 2015), 80 FR 34751 (June 17, 2015)
(approving NYSE MKT’s establishment of a ROC of
the exchange’s Board of Directors) (‘‘NYSE MKT
Approval Order’’) and 75155 (June 11, 2015), 80 FR
34744 (June 17, 2015) (approving NYSE Arca’s
establishment of a ROC of the exchange’s Board of
Directors) (‘‘NYSE Arca Approval Order’’).
9 See Securities Exchange Act Release No. 53128
(January 13, 2006), 71 FR 3550 (January 23, 2006)
(order granting application of NASDAQ for
registration as a national securities exchange)
(‘‘NASDAQ Approval Order’’).
10 See Notice, supra note 4, at 37317.
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satisfies the independence requirements
of the Exchange.11 The Exchange states
that a ROC comprised of at least three
independent members has been
recognized as one of several measures
that can help ensure the independence
of the regulatory function from the
market operations and commercial
interests of a national securities
exchange.12
In addition, Section 2.03(h)(ii) of the
Operating Agreement would provide
that the Board, on affirmative vote of a
majority of Directors, at any time may
remove a member of the ROC for cause,
and also would provide that a failure of
the ROC member to qualify as
independent under the Company
Director Independence Policy would
constitute a basis to remove a member
of the ROC for cause. If the term of
office of a ROC member terminates, and
the remaining term of office of such
member at the time of termination is not
more than three months, Section
2.03(h)(ii) would provide that during
the period of vacancy, the ROC would
not be deemed to be in violation of its
compositional requirements by virtue of
the vacancy. To clarify the process for
filling vacancies on any committee of
the Exchange, including the ROC, the
Exchange also proposes to amend
Section 2.03(h) of the Operating
Agreement to provide that vacancies in
the membership of any committee shall
be filled by the Board. The Exchange
believes that the proposed rule change
creating an independent Board
committee to oversee the adequacy and
effectiveness of the performance of its
self-regulatory responsibilities is
consistent with previously approved
rule changes for other SROs and would
enable the Exchange to undertake its
regulatory responsibilities under a
corporate governance structure that is
consistent with its industry peers.13
Moreover, the Exchange believes that
the proposed ROC would ensure the
continued independence of the
regulatory process.14 The Exchange
states that oversight of the Exchange’s
self-regulatory responsibilities and
regulatory performance, including
review of the regulatory plan, programs,
budget and staffing by a ROC composed
of individuals independent of Exchange
11 The Exchange’s independence requirements are
set forth in the Company Director Independence
Policy of the Exchange. See Securities Exchange Act
Release No. 67564 (August 1, 2012), 77 FR 47161
(August 7, 2012) (SR–NYSE–2012–17) (approving,
among other things, the Exchange’s Company
Director Independence Policy).
12 See Notice, supra note 4, at 37317.
13 See id. See also NASDAQ Approval Order,
NYSE MKT Approval Order and NYSE Arca
Approval Order, supra notes 8 and 9.
14 See Notice, supra note 4, at 37317.
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Federal Register / Vol. 80, No. 191 / Friday, October 2, 2015 / Notices
management and a CRO having general
supervision of the regulatory operations
of the Exchange that meets regularly
with the ROC is integral to the
proposal.15
The Exchange also proposes to make
conforming amendments to Exchange
Rules 1, 46, 46A and 497 by replacing
references to ‘‘Board of Directors of
NYSER’’ and ‘‘NYSE Regulation Board
of Directors’’ with references to the
ROC.
B. Terminating the Delegation
Agreement, Deleting Exchange Rule 20,
and Conforming the Operating
Agreement and Other Exchange Rules
The Exchange proposes to terminate
the Delegation Agreement and delete
Exchange Rule 20, which sets forth the
delegation of the Exchange’s regulatory
functions to NYSE Regulation and the
Exchange’s market functions to NYSE
Market (DE),16 each of which is a
subsidiary of the Exchange created in
2006 following the merger of New York
Stock Exchange, Inc. with Archipelago
Holdings, Inc.17 In connection with that
transaction, NYSE Regulation became a
separate not-for-profit entity, and its
Board of Directors assumed the
regulatory oversight functions and
responsibilities of the Exchange that are
proposed to be assumed by the ROC.
The Exchange notes that, although the
Delegation Agreement sets forth the
terms under which the Exchange
delegated its functions to NYSE
Regulation and NYSE Market (DE), the
Exchange retained ultimate
responsibility for the operations, rules
and regulations developed by NYSE
Regulation and NYSE Market (DE) and
for their enforcement.18
15 See
id.
Exchange Rule 20(a). Exchange Rule 20(b)
requires that NYSE Market (DE) establish a Market
Performance Committee and that NYSE Regulation
establish a Regulatory Advisory Committee, each to
include persons associated with member
organizations and representatives of both those
member organizations doing business on the Floor
of the Exchange and those who do not do business
on the Floor. The Exchange does not propose to
retain these committees. Rather, the Exchange
proposes that the Committee for Review, which
would include persons associated with member
organizations and representatives of both those
member organizations doing business on the Floor
of the Exchange and those who do not do business
on the Floor, assume the advisory roles of these
committees. See Section II.E., infra.
17 See Notice, supra note 4, at 37318.
18 The Exchange notes that functions delegated to
NYSE Market (DE) included, among other things,
operating the NYSE marketplace, including the
automated systems supporting it; providing and
maintaining a communications network
infrastructure linking market participants for the
efficient process and handling of quotations, orders,
transaction reports and comparisons of transactions;
acting as a Securities Information Processor for
quotations and transaction information related to
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16 See
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With the termination of the
Delegation Agreement, the Exchange
proposes to re-integrate its regulatory
and market functions.19 The Exchange
believes that its proposal to establish a
ROC to undertake the independent
oversight of the Exchange’s regulatory
responsibilities would ensure
independent oversight of the regulatory
process and would have the additional
benefit of aligning the Exchange’s
corporate governance practices with its
industry peers.20
The Exchange proposes to
functionally separate its regulatory
functions from its business lines.21 The
Exchange’s CRO would head the
Exchange’s regulatory department and
continue to manage the Exchange’s
regulatory functions, under the
oversight of the proposed ROC. The
regulatory staff supporting the
regulatory functions of NYSE would
report to the CRO. The Exchange
believes that a CRO reporting to an
independent ROC should add a
‘‘significant degree of independence’’
and should ‘‘insulate’’ regulatory
activity from economic pressures and
potential conflicts of interest.22
The Exchange proposes to make
certain conforming amendments to its
Rules to reflect the termination of the
Delegation Agreement and the reintegration of its regulatory and market
operations. As further described in the
Notice,23 the Exchange proposes
conforming amendments in Section 4.05
of the Exchange’s Operating Agreement,
and Exchange Rules 0, 1, 22, 36
(Supplementary Material .30), 37, 46,
48, 49, 54(b), 70 (subparts (1) and (7) of
Supplementary Material .40), 103, 103A,
103B, 104, 422, 476A and 497, by
removing references to NYSE Regulation
and NYSE Market 24 and, where
applicable, replacing such deletions
with references to the Exchange or to
the applicable Exchange personnel, as
appropriate, who will be carrying out
the regulatory responsibilities on behalf
securities traded on NYSE and other trading
facilities operated by NYSE Market (DE);
administering the Exchange’s participation in
National Market System Plans; and collecting,
processing, consolidating and providing to NYSE
Regulation accurate information requisite to
operation of the surveillance audit trail. See id. at
37318 n.21.
19 See Notice, supra note 4, at 37322.
20 See id. at 37318.
21 See id.
22 See id. (citing Securities Exchange Act Release
No. 48946 (December 17, 2003), 68 FR 74678, 74687
(December 24, 2003)).
23 See id. at 37318–19.
24 The Exchange notes that NYSE Market (DE)
was formerly known as ‘‘NYSE Market, Inc.’’
Accordingly, references to ‘‘NYSE Market’’ in the
Exchange Rules and Operating Agreement are
references to NYSE Market (DE).
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59839
of the Exchange following the
termination of the Delegation
Agreement.
C. Deleting NYSE Market (DE) and
NYSE Regulation’s Organizational
Documents as Rules of the Exchange
With the termination of the
Delegation Agreement, NYSE Regulation
and NYSE Market (DE) no longer would
be performing the Exchange’s regulatory
and market functions, respectively.
According to the Exchange, the
previously filed constituent documents
of NYSE Regulation and NYSE Market
(DE) therefore no longer would
constitute ‘‘rules of [the] exchange’’
under Section 3(a)(27) of the Act.25 As
a result, the Exchange proposes to
remove the following NYSE Regulation
and NYSE Market (DE) constituent
documents as rules of the Exchange
upon termination of the Delegation
Agreement:
• Restated Certificate of Incorporation
of NYSE Regulation, Inc.;
• Seventh Amended and Restated
Bylaws of NYSE Regulation, Inc.;
• Independence Policy of NYSE
Regulation, Inc.;
• Third Amended and Restated
Certificate of Incorporation of NYSE
Market (DE), Inc.;
• Fourth Amended and Restated
Bylaws of NYSE Market (DE), Inc.; and
• Independence Policy of NYSE
Market (DE), Inc.26
D. Establishing a DCRC and Naming
Non-Affiliated Director Candidates
Section 2.03(a)(iii) of the Operating
Agreement provides that Non-Affiliated
Director Candidates (also known as
‘‘Fair Representation Candidates’’) are
nominated by the nominating and
governance committee (‘‘NGC’’) of the
Intercontinental Exchange, Inc. (‘‘ICE’’)
Board of Directors, which must
designate as Non-Affiliated Director
Candidates the candidates
recommended jointly by the NYSE
Market (DE) DCRC and the NYSE
Regulation DCRC. Section 2.03(a)(iv) of
the Operating Agreement describes the
process whereby member organizations
can nominate alternate candidates to
those candidates selected by the NYSE
Market (DE) DCRC and the NYSE
Regulation DCRC.
25 15
U.S.C. 78c(a)(27).
Commission notes that on September 22,
2015, NYSE MKT LLC filed a proposed rule change
to add the Third Amended and Restated Certificate
of Incorporation of NYSE Market (DE), Inc. and the
Eighth Amended and Restated Operating
Agreement of New York Stock Exchange LLC as
‘‘rules of [the] exchange’’ of NYSE MKT in light of
NYSE Market (DE), Inc.’s majority ownership
interest in a facility of NYSE MKT. See Securities
Exchange Act Release No. 75984 (September 25,
2015) (SR–NYSEMKT–2015–71).
26 The
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The Exchange proposes to establish a
NYSE DCRC as a committee of the
Board by adding new subsection (h)(i) to
Section 2.03 of the Operating
Agreement, and making conforming
changes to Section 2.03(a)(iii) and
Section 2.03(a)(iv) by substituting the
proposed NYSE DCRC for the NYSE
Market (DE) DCRC and NYSE
Regulation DCRC in the nominating
process for Non-Affiliated Director
Candidates. The Exchange states that,
once the Delegation Agreement is
terminated, neither the NYSE Market
(DE) DCRC nor the NYSE Regulation
DCRC should have a role in the
nomination of Non-Affiliated Director
Candidates process, as the Exchange no
longer would be delegating any market
or regulatory responsibilities to either
entity.27
Proposed Section 2.03(h)(i) of the
Operating Agreement provides that the
Board would appoint the members of
the NYSE DCRC on an annual basis and
that the NYSE DCRC would be
responsible for recommending NonAffiliated Director Candidates to the ICE
NGC. Proposed Section 2.03(h)(i) also
sets forth the compositional
requirements for the NYSE DCRC.28
Specifically, the NYSE DCRC would
include individuals who are associated
with a member organization, and would
include at least one individual from
each of the following categories, that:
• Engages in a business involving
substantial direct contact with securities
customers;
• is registered as a Designated Market
Maker (‘‘DMM’’) and spends a
substantial part of their time on the
trading floor; and
• spends a majority of their time on
the trading floor of the Exchange and
has as a substantial part of their
business the execution of transactions
on the trading floor of the Exchange for
other than their own account or the
account of his or her Member
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27 See
Notice, supra note 4, at 37320.
28 The proposed requirements are substantially
similar to the requirements for the DCRCs of NYSE
Regulation, NYSE Market (DE), and NYSE MKT.
See Seventh Amended and Restated Bylaws of
NYSE Regulation, Inc., Article III, Section 5; Fourth
Amended and Restated Bylaws of NYSE Market
(DE), Inc., Article III, Section 5; and Sixth Amended
and Restated Operating Agreement of NYSE MKT
LLC, Section 2.03(h). The Exchange notes that
NYSE MKT has a fourth category of requirements
similar to the third category noted above but it
includes an individual that engages in the
execution of transactions on NYSE MKT’s trading
floor for the associate person’s own account.
Because neither the NYSE Market (DE) DCRC nor
the NYSE Regulation DCRC, which the NYSE DCRC
is replacing, has this fourth category, the Exchange
does not propose to include it in the revised
Operating Agreement. See Notice, supra note 4, at
37320 n.37.
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Organization, but is not registered as a
DMM.
As proposed, Section 2.03(h)(i) would
provide that the Board appoint such
individuals after appropriate
consultation with representatives of
member organizations. Furthermore, the
Exchange proposes to replace references
to ‘‘NYSE Market DCRC’’ and ‘‘NYSE
Regulation DCRC’’ with ‘‘NYSE DCRC’’
in Section 2.03(a)(iii) and Section
2.03(a)(iv) of the Operating Agreement.
According to the Exchange, one
benefit of the proposed rule change is
that the Exchange’s process for selecting
Non-Affiliated Director Candidates
would be harmonized with a similar
process in place at NYSE MKT, an
affiliate of the Exchange.29 Further, the
Exchange believes that the proposed
rule change would allow the Board to
have a more direct role in the
appointment of Non-Affiliated Director
Candidates while complying with the
fair representation requirement under
Section 6(b)(3) of the Act,30 which is
intended to give members a voice in the
selection of an exchange’s directors and
the administration of its affairs.31 In
particular, the Exchange notes that, as is
the case with the NYSE Regulation
DCRC and NYSE Market (DE) DCRC, the
proposed NYSE DCRC would be
comprised of persons associated with
Exchange member organizations and
selected after appropriate consultation
with those member organizations. The
proposed Operating Agreement also
retains a process by which members
could directly petition and vote for
representation on the Board.32 The
Exchange therefore believes that the
proposal would continue to allow
members to have a voice in the
Exchange’s use of its self-regulatory
authority, consistent with Section
6(b)(3) of the Act.33
E. Establishing a Committee for Review
and Conforming Exchange Rules
The Exchange proposes to establish a
Committee for Review (‘‘CFR’’) as a
subcommittee of the ROC by adding a
new subsection (h)(iii) to Section 2.03 of
the Operating Agreement and to make
conforming changes to Exchange Rules
308, 475, 476, 476A, and 9310.34 The
proposed CFR would be the successor to
the current CFR, which is a committee
of NYSE Regulation’s Board of
29 See
Notice, supra note 4, at 37316.
15 U.S.C. 78f(b)(3).
31 See Notice, supra note 4, at 37320.
32 NYSE’s Operating Agreement, Section
2.03(a)(iv).
33 See Notice, supra note 4, at 37320 and 15
U.S.C. 78f(b)(3).
34 See Notice, supra note 4, at 37320–21.
30 See
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Sfmt 4703
Directors.35 Section 2.03(h)(iii) of the
Operating Agreement would provide
that the Board shall annually appoint
the members of the CFR. The Exchange
notes that the proposed Section
2.03(h)(iii) of the Operating Agreement
incorporates member organization
association requirements of the current
CFR.36 The proposed CFR would be
comprised of both Exchange directors
who satisfy the NYSE’s independence
requirements as well as non-directors.37
The Exchange notes that because the
majority of the Board would be
independent and any Non-Affiliated
Director must be independent, as a
functional matter if the Exchange were
to have a five-person Board, four of the
five directors would qualify for CFR
membership.38 Non-directors serving on
the proposed CFR would include
representatives of member organizations
that engage in a business involving
substantial direct contact with securities
customers (upstairs firms), DMMs, and
floor brokers.39 The Exchange notes that
the proposed CFR, like the current CFR,
would be selected after appropriate
consultation with those members. The
Exchange notes further that for any CFR
vote, a majority of the members of the
CFR casting votes would have to be
directors of the Exchange.
The proposed CFR would be
responsible for reviewing the
disciplinary decisions on behalf of the
Board and reviewing determinations to
limit or prohibit the continued listing of
an issuer’s securities on the Exchange.40
Additionally, the Exchange proposes to
incorporate the role of the Market
Performance and Regulatory Advisory
Committees into the proposed CFR.41 As
a result, the proposed CFR would be
charged with acting in an advisory
capacity to the Board with respect to
disciplinary matters, the listing and
delisting of securities, regulatory
35 See
id. at 37320.
id. at 37321.
37 See id. at 37320–21.
38 See id. at 37320–21 n.42.
39 See id. at 37321.
40 The Exchange notes that these powers are
currently set forth in the charter of the NYSE
Regulation CFR, which also states that the CFR can
provide general advice to the NYSE Regulation
Board of Directors in connection with disciplinary,
listing and other regulatory matters. The Exchange
proposes to delineate the appellate and advisory
powers of the proposed CFR in Section 2.03(h)(iii)
of the Operating Agreement. Appeals of delisting
determinations are governed by Rule 804.00 of the
Exchange’s Listed Company Manual, which
provides that delisting determinations are to be
reviewed by a ‘‘Committee of the Board of Directors
of the Exchange’’. See Notice, supra note 4, at 37321
n.44.
41 Id. at 37321. The Exchange notes that the same
profile of members who historically served on these
advisory committees would be represented on the
proposed CFR. Id.
36 See
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programs, rulemaking and regulatory
rules, including trading rules. The
Exchange states that the proposed CFR
would therefore serve in the same
advisory capacity as the Market
Performance and Regulatory Advisory
Committees.42
According to the Exchange, member
participation on the proposed CFR
would be sufficient to provide for the
fair representation of members in the
administration of the affairs of the
Exchange, including rulemaking and the
disciplinary process, consistent with
Section 6(b)(3) of the Act.43
Finally, the Exchange proposes to
make conforming amendments to
Exchange Rules 308, 475, 476, 476A and
9310 by generally replacing references
to the current NYSE Regulation CFR
with references to the ‘‘Committee for
Review.’’
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F. Modifying Exchange Rules To
Reference the Exchange’s Chief
Regulatory Officer
The Exchange also proposes to amend
Exchange Rule 48 (Exemptive Relief—
Extreme Market Volatility Condition),
Exchange Rule 49 (Emergency Powers)
and Exchange Rule 86 (NYSE BondsSM)
by replacing references to the Chief
Executive Officer of NYSE Regulation
with references to the CRO of the
Exchange.
Exchange Rule 48 currently provides
that, for purposes of the rule, a
‘‘qualified Exchange officer’’ means the
Chief Executive Officer of ICE, or his or
her designee, or the Chief Executive
Officer of NYSE Regulation, or his or
her designee. Exchange Rule 48
provides that the Exchange can invoke
an extreme market volatility condition
at the open (or reopen of trading
following a market-wide halt of
securities) during which time the
Exchange could suspend Exchange
Rules 15, 79A.30, and 123D(1) regarding
obtaining certain prior Floor Official
approvals and requirements for
mandatory indications. Exchange Rule
49 addresses the Exchange’s emergency
powers and defines the term ‘‘qualified
Exchange officer’’ as, inter alia, the
‘‘NYSE Regulation, Inc. Chief Executive
Officer’’ or his or her designee.
Exchange Rule 86 currently provides
that Clearly Erroneous Execution panels
in connection with trades on NYSE
MKT Bonds be comprised of the Chief
Executive Officer of NYSE Regulation or
a designee and representatives from two
42 See
43 See
Notice, supra note 4, at 37321.
id. and 15 U.S.C. 78f(b)(3).
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20:43 Oct 01, 2015
Jkt 238001
members or member organizations that
are users of NYSE Bonds.44
The Exchange notes that ‘‘Chief
Executive Officer’’ of NYSE Regulation
is used in these three rules but CRO is
used throughout the Exchange’s rules to
designate the same person.45 The
Exchange, thus, proposes to replace
references to ‘‘Chief Executive Officer’’
of NYSE Regulation in Exchange Rules
48, 49 and 86 with either the term
‘‘Chief Regulatory Officer’’ or ‘‘CRO’’, as
appropriate.
As noted above, the Commission
received one comment letter on the
proposed rule change.46 The commenter
states that, with respect to the existing
system of the Exchange’s governance,
the proposed rule change would replace
a structural separation with a functional
separation, in particular, by terminating
the Delegation Agreement and
establishing a ROC in lieu of NYSE
Regulation.47 The commenter expresses
the concern that the Exchange’s
proposal would not ensure sufficient
insulation of the Exchange’s regulatory
function from the commercial interests
of its holding company.48 The
commenter enumerates the following
specific concerns with the proposal:
Unlike NYSE Regulation, the Exchange
is a ‘‘for profit’’ entity; NYSE Regulation
has a board consisting entirely of
independent directors; NYSE Regulation
limits the number of directors from the
holding company who can sit on its
board to less than a majority, while the
Board could include a super-majority of
directors from the holding company; the
ROC would have little substantive
authority and can only ‘‘review’’ the
regulatory budget and ‘‘inquire’’ about
the adequacy of resources for regulatory
activities; the ROC would not be
sufficiently insulated from the business
activities of the holding company
because the ROC’s membership could be
composed of persons who also are
directors of the holding company; the
CRO position would not be adequately
insulated from the commercial interests
of the holding company; and the CFR
would not effectively insulate the
disciplinary review process from
possible commercial influences.49
44 NYSE Bonds is the Exchange’s electronic bond
trading platform. Rule 86 prescribes what bonds are
eligible to trade on the NYSE Bonds platform and
how bonds are traded on the platform, including
the receipt, execution and reporting of bond
transactions. See Notice, supra note 4, at 37321
n.50.
45 See, e.g., Exchange Rules 13, 107B, 107C and
128.
46 See Professor Brown Letter, supra note 5.
47 Id. at 4–5.
48 Id. at 6.
49 Id. at 6–7.
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59841
The commenter offers a number of
suggested revisions to the proposed rule
change that in his view would
strengthen the independence of the
Exchange’s regulatory function: The
Board should consist entirely of
independent directors, other than the
Chief Executive Officer, and should not
include any holding company directors
or directors of affiliates; the ROC should
consist entirely of independent
directors; the ROC should have greater
substantive authority over its budget
and other critical functions and should
have greater authority with respect to
the CRO and the CRO’s compensation;
CFR membership should be limited to
members of the ROC and persons
appointed by the ROC; and the
provision regarding removal of a
director ‘‘for cause’’ should be defined
so as to restrict the Board from easily
changing the ROC’s membership.50 The
commenter suggests that the Delegation
Agreement could remain in place and
the Exchange could seek modifications
to, rather than replace, the existing
governance system.51
The Exchange submitted a letter
responding to the commenter’s letter.52
The Exchange discusses each of the
commenter’s issues with its proposal
and the commenter’s recommendations
for revision.53 With respect to the
elimination of NYSE Regulation and the
creation of a ROC, the Exchange states
that, as a self-regulatory organization
(‘‘SRO’’), it has always retained the
‘‘ultimate responsibility for the
fulfillment of its statutory and selfregulatory obligations under the Act.’’ 54
With respect to the composition of the
ROC, the Exchange notes that under the
proposal the ROC would be required to
be composed of at least three members,
each of whom would be required to be
a director of the Exchange that satisfies
the independence requirements of the
Company Director Independence Policy,
which, according to the Exchange, is
virtually identical to the NYSE
Regulation Independence Policy.55 The
Exchange further states that its
Operating Agreement recently was
amended to remove the requirement
that the Board consist of at least a
majority of independent directors of the
holding company.56 In addition, the
Exchange points out that its proposed
ROC was modeled on the NASDAQ
50 Id.
at 8–9.
at 8.
52 See NYSE Response Letter, supra note 6.
53 Id.
54 Id.
55 Id.
56 Id. at 7 (citing Securities Exchange Act Release
No. 75105 (June 4, 2015), 80 FR 33005 (June 10,
2015)).
51 Id.
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ROC and has the same powers and its
responsibilities are substantially similar
to the ROCs of other SROs.57 The
Exchange also notes that the proposal
‘‘clearly provides that the CRO would
report to the ROC’’ 58 and, given that
fact, the ROC ‘‘clearly has the power to
retain or dismiss the CRO, only it must
do so in consultation with the
Exchange’s Chief Executive Officer as
part of the process of establishing goals,
assessing performance, and
recommending the CRO’s
compensation.’’ 59
The Exchange also addresses the
commenter’s suggested revisions to the
Exchange’s proposal. As an initial
matter, the Exchange states that the
commenter ‘‘has not provided any
credible reason why the current
structure should remain or why the
Exchange’s Proposal is not consistent
with the requirements of the Act.’’ 60
The Exchange does not believe that
directors that meet its independence
standards are less independent because
they also serve as directors of ICE or ICE
affiliates.61 The Exchange further states
that it ‘‘rejects the proposition that
directors of NYSE Regulation are
inherently more independent than
independent directors of ICE that serve
as independent directors of the
Exchange.’’ 62 Regarding the
commenter’s suggestions about the ROC,
the Exchange reiterated its position that
the proposed ROC and its authority is
consistent with prior exchanges’
provisions relating to ROCs that were
found by the Commission to be
consistent with the Act.63 Regarding the
commenter’s suggestion that the CFR be
limited to members of the ROC and
members appointed by the ROC, the
Exchange states its view that the
requirement that members of the CFR be
independent directors of the Exchange
is sufficient to ensure the integrity of the
disciplinary appeals process.64 With
respect to the commenter’s suggestion
that the proposal permitting removal of
a ROC member ‘‘for cause’’ be revised to
limit the Board’s ability to easily change
the ROC’s membership, the Exchange
notes that at least one SRO does not
require ‘‘cause’’ as a basis for removing
a ROC member.65
57 Id.
at 8.
60 Id.
at 9.
at 10.
61 Id.
62 Id.
63 Id.
64 Id.
at 10–11.
at 11.
65 Id.
VerDate Sep<11>2014
After careful review, 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.66 In
particular, the Commission finds that
the proposed rule change is consistent
with Section 6(b)(1) of the Act, which
requires an exchange to be so organized
and have the capacity to carry out the
purposes of the Act and to comply, and
to enforce compliance by its members
and persons associated with its
members, with the Act, the rules and
regulations thereunder, and the rules of
the exchange.67 The Commission finds
that the proposal also is consistent with
the requirements of Section 6(b)(3) of
the Act, which provides that the rules
of an exchange must assure a fair
representation of its members in the
selection of its directors and
administration of its affairs and provide
that one or more directors shall be
representative of issuers and investors
and not be associated with a member of
the exchange, broker, or dealer.68 In
addition, the Commission finds that the
proposal is consistent with Section
6(b)(5) of the Act, which requires that
the rules of the exchange be 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.69 Finally, the
Commission finds that the proposal is
consistent with Section 6(b)(6) of the
Act, which requires that the rules of the
exchange provide that its members and
persons associated with its members
shall be appropriately disciplined for
violation of the provisions of the Act,
the rules or regulations thereunder, or
the rules of the exchange.70
As noted above, the commenter
expresses the concern that the
Exchange’s proposal would not ensure
sufficient insulation of the Exchange’s
regulatory function from the commercial
interests of its holding company.71 The
commenter also questions the adequacy
of the independence of the directors of
66 In approving this proposed rule change, the
Commission notes that it has considered the
proposed rule’s impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
67 15 U.S.C. 78f(b)(1).
68 15 U.S.C. 78f(b)(3).
69 15 U.S.C. 78f(b)(5).
70 15 U.S.C. 78f(b)(6).
71 See Professor Brown Letter, supra note 5, at 6.
58 Id.
59 Id.
III. Discussion and Commission
Findings
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Sfmt 4703
the Exchange’s Board.72 In response, the
Exchange states that the commenter has
not provided an adequate reason why
the Exchange’s current structure should
remain or why the proposal is not
consistent with the requirements of the
Act.73
As a preliminary matter, the
Commission notes that several concerns
raised by the commenter relate to the
fact that the Exchange is part of a
holding company structure. In that
regard, the commenter suggests that the
replacement of NYSE Regulation with
the ROC would not provide sufficient
insulation of the Exchange’s regulatory
functions from the commercial interests
of the holding company.74 The
Commission notes that, although the
Exchange may be part of a holding
company structure, the Exchange is
obligated to satisfy its self-regulatory
obligations under the Act and rules and
regulations thereunder.75 The
Commission believes that the regulatory
structure proposed by the Exchange is
consistent with the Act and the rules
and regulations thereunder, and is
substantially similar to regulatory
structures that were approved by the
Commission for other exchanges.76 In
addition, contrary to the commenter’s
understanding that the Operating
Agreement ‘‘requires that the Board
consist of at least a majority of
independent directors from the holding
company,’’ 77 the Operating Agreement
no longer contains such a requirement
pursuant to amendments to the
Operating Agreement that recently were
approved by the Commission.78 The
Commission notes that the Operating
Agreement also requires that the Board
consist of a majority of directors that
satisfy the Company Director
Independence Policy.79
The commenter expresses the view
that the ROC would not have sufficient
substantive authority over the
72 Id.
73 See
74 See
NYSE Response Letter, supra note 6, at 10.
Professor Brown Letter, supra note 5, at 6–
7.
75 The Commission previously has stated that
there is no ‘‘overriding regulatory reason to require
exchanges to be not-for-profit membership
organizations.’’ See Securities Exchange Act Release
No. 40760 (December 8, 1998), 63 FR 70844, 70880
(December 22, 1988) (‘‘Regulation ATS Adopting
Release’’). In the Regulation ATS Adopting Release,
the Commission also noted that ‘‘it is possible for
a for-profit exchange to meet the standards set forth
in Section 6(b) of the Exchange Act.’’ Id.
76 See NASDAQ Approval Order, NYSE MKT
Approval Order and NYSE Arca Approval Order,
supra notes 8 and 9.
77 See Professor Brown Letter, supra note 5, at 6.
78 See Securities Exchange Act Release No. 75105
(June 4, 2015), 80 FR 33005 (June 10, 2015).
79 NYSE’s Operating Agreement, Section
2.03(a)(i).
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Federal Register / Vol. 80, No. 191 / Friday, October 2, 2015 / Notices
Exchange’s regulatory program.80 In
response, the Exchange states that the
ROC was modeled on the NASDAQ
ROC and has the same powers,
including the power to review the
regulatory budget and inquire about
available regulatory resources.81 The
Commission believes that the
Exchange’s proposal to establish a ROC,
as an independent committee of the
Exchange to oversee the adequacy and
effectiveness of the Exchange’s
regulatory operations, should help the
Exchange to fulfill its statutory
obligation to comply, and to enforce
compliance by its members and persons
associated with its members, with the
Act, the rules and regulations
thereunder, and the rules of the
Exchange.82 In addition, the
Commission believes that the
composition of the ROC, which would
consist of at least three members of the
Board that satisfy the Company Director
Independence Policy, should help
ensure the independence of the
regulatory function of the ROC. The
Commission also believes that the
Exchange’s proposal to make
conforming changes to various
Exchange Rules to reflect the creation of
the ROC is appropriate.83 The
Commission therefore finds that the
proposed provisions relating to the ROC
and its composition are consistent with
the Act, including Sections 6(b)(1) and
6(b)(5) of the Act.
The commenter also raises a concern
about the proposed functional
separation, rather than the existing
structural separation, between the
Exchange’s regulatory and market
functions that would result from the
Exchange’s proposal to terminate the
Delegation Agreement and delete
Exchange Rule 20.84 In response, the
Exchange states that the Commission’s
prior approval of its current regulatory
structure would not preclude alternative
regulatory structures, such as a
functional separation, that also would
be consistent with the Act.85 The
Commission believes that the
Exchange’s proposal to re-integrate its
regulatory and market functions into the
Exchange, rather than to continue to
have certain regulatory and market
80 See
Professor Brown Letter, supra note 5, at 7.
NYSE Response Letter, supra note 6, at 8.
82 The Commission notes that, under proposed
Section 2.03(h)(ii) of the Operating Agreement, the
responsibilities, enumerated functions, and
authority of the ROC are substantially similar to
those of other exchanges. See NASDAQ Approval
Order, NYSE MKT Approval Order and NYSE Arca
Approval Order, supra notes 8 and 9.
83 See Notice, supra note 4, at 37317–18.
84 See Professor Brown Letter, supra note 5, at 6.
85 See NYSE Response Letter, supra note 6, at 4.
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81 See
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20:43 Oct 01, 2015
Jkt 238001
duties performed by its subsidiaries,
NYSE Regulation and NYSE Market,
respectively, is consistent with the Act,
and thus it is appropriate for the
Exchange to terminate the Delegation
Agreement and delete Exchange Rule
20, particularly in light of the
Exchange’s proposal to establish a ROC.
The Commission notes that under the
Delegation Agreement, the Exchange
ultimately was responsible for fulfilling
the self-regulatory obligations delegated
to NYSE Regulation and NYSE Market
(DE).86 Thus, upon termination of the
Delegation Agreement and deletion of
Exchange Rule 20, the Exchange’s
regulatory responsibilities would
remain unchanged; the major difference
would be that the Exchange itself would
directly carry out the regulatory
responsibilities and market operations
previously performed by its
subsidiaries. The Commission also finds
that it is consistent with the Act for the
Exchange to make conforming changes
to Exchange Rules to reflect the
termination of the Delegation
Agreement and deletion of Exchange
Rule 20.87
The commenter further states that the
CFR would not effectively insulate the
disciplinary review process from the
possibility of commercial influences
and expresses concern about the
composition of the CFR.88 In response,
the Exchange states that the CFR would
be appointed annually by the Board as
a subcommittee of the ROC and would
be comprised of both Exchange directors
who satisfy the Company Director
Independence Policy as well as member
participants.89 According to the
Exchange, the CFR’s mandate would
include acting in an advisory capacity to
the Board with respect to disciplinary
matters, the listing and delisting of
securities, regulatory programs, and
rulemaking and regulatory rules,
including trading rules.90 The
Commission believes that the
Exchange’s proposal to establish a CFR
is appropriate and would provide for
the fair representation of members in
the administration of the Exchange’s
affairs, and also would help enable the
Exchange to ensure that members and
persons associated with its members
shall be appropriately disciplined for
violations of the provisions of the Act,
the rules or regulations thereunder, or
the rules of the Exchange.91 The
Commission therefore finds that the
proposed provisions relating to the CFR
are consistent with the Act, including
Sections 6(b)(3) and 6(b)(6)
thereunder.92
The Commission believes that the
Exchange’s proposal to create the NYSE
DCRC as a committee of the Board that
would recommend to the ICE NGC the
Non-Affiliated Director candidates to
serve on the Board, in place of the NYSE
Regulation DCRC and the NYSE Market
DCRC, provides an appropriate process
for the nomination of Exchange
members to serve on the Board. The
Commission believes that the
composition of the NYSE DCRC, along
with the provision in the Operating
Agreement that would allow members
to directly nominate Non-Affiliated
Director candidates through a petition
process,93 and the requirement that
NYSE Group, Inc. must appoint or elect
as the Non-Affiliated Directors those
candidates nominated by the ICE NGC
(or designate as Non-Affiliated Directors
the candidates that emerge from the
petition and voting process), should
help to ensure the fair representation of
members in the selection of the
Exchange’s directors. Thus the
Commission finds that the proposal to
establish the NYSE DCRC is consistent
with the Act, including Section 6(b)(3)
thereunder.94
Finally, the Commission believes that
it is consistent with the Act for the
Exchange to make conforming revisions
to various Exchange Rules to reflect the
proposed changes to its governance
structure. In this regard, the
Commission believes that it is
appropriate for the Exchange to delete
the organizational documents of NYSE
Regulation and NYSE Market (DE) and
to replace references to the Chief
Executive Officer of NYSE Regulation
with references to the CRO in Exchange
Rules 48, 49, and 86.
IV. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act, that the
proposed rule change (SR–NYSE–2015–
27) is approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.95
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015–24971 Filed 10–1–15; 8:45 am]
BILLING CODE 8011–01–P
Delegation Agreement, Section I.
87 See Notice, supra note 4, at 37318–19.
88 See Professor Brown Letter, supra note 5, at 7.
89 See NYSE Response Letter, supra note 6, at 4.
90 Id.
91 15 U.S.C. 78f(b)(3) and 15 U.S.C. 78(b)(6).
86 See
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Sfmt 9990
59843
92 Id.
93 NYSE’s Operating Agreement, Section
2.03(a)(iv).
94 15 U.S.C. 78f(b)(3).
95 17 CFR 200.30–3(a)(12).
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]]>Agencies
[Federal Register Volume 80, Number 191 (Friday, October 2, 2015)]
[Notices]
[Pages 59837-59843]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-24971]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-75991; File No. SR-NYSE-2015-27]
Self-Regulatory Organizations; New York Stock Exchange LLC; Order
Approving Proposed Rule Change Amending the Eighth Amended and Restated
Operating Agreement of the Exchange To Establish a Regulatory Oversight
Committee as a Committee of the Board of Directors of the Exchange and
Amending Other Rules of the Exchange
September 28, 2015.
I. Introduction
On June 12, 2015, New York Stock Exchange LLC (``NYSE'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) \1\ of the Securities
Exchange Act of 1934 (``Act''),\2\ and Rule 19b-4 thereunder,\3\ a
proposed rule change to amend the Eighth Amended and Restated Operating
Agreement (``Operating Agreement'') of the Exchange and to amend other
rules of the Exchange, as described below. The
[[Page 59838]]
proposed rule change was published for comment in the Federal Register
on June 30, 2015.\4\ The Commission received one comment letter on the
proposed rule change \5\ and a response to the comment letter from the
Exchange.\6\ On August 11, 2015, the Commission extended the time
period in which to approve the proposed rule change, disapprove the
proposed rule change, or institute proceedings to determine whether to
disapprove the proposed rule change, to September 28, 2015.\7\ This
order approves the proposed rule change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.
\4\ See Securities Exchange Act Release No. 75288 (June 24,
2015), 80 FR 37316 (``Notice'').
\5\ See letter from J. Robert Brown, Jr., Professor of Law &
Director, Corporate & Commercial Law Program, University of Denver
Sturm College of Law, to Brent J. Fields, Secretary, Commission,
dated September 8, 2015 and received by the Commission on September
21, 2015 (``Professor Brown Letter'').
\6\ See letter from Martha Redding, Senior Counsel and Assistant
Secretary, NYSE, to Brent J. Fields, Secretary, Commission, dated
September 24, 2015 and received by the Commission on September 24,
2015 (``NYSE Response Letter'').
\7\ See Securities Exchange Act Release No. 75659, 80 FR 49285
(August 17, 2015).
---------------------------------------------------------------------------
II. Description of the Proposal
NYSE proposes to: (i) Amend the Exchange's Operating Agreement to
establish a Regulatory Oversight Committee (``ROC'') as a committee of
the Exchange's Board of Directors (``Board'') and make conforming
amendments to Exchange Rules 1, 46, 46A, and 497; (ii) terminate the
Delegation Agreement (``Delegation Agreement'') among the Exchange,
NYSE Market (DE), Inc. (``NYSE Market (DE)''), and NYSE Regulation,
Inc. (``NYSE Regulation''), delete Exchange Rule 20, which sets forth
the terms of the delegation, and make conforming amendments to Section
4.05 of the Operating Agreement and Exchange Rules 0, 1, 22, 36, 37,
46, 48, 49, 54, 70, 103, 103A, 103B, 104, 422 476A, and 497; (iii)
remove from the Exchange Rules certain organizational documents of NYSE
Market (DE) and NYSE Regulation in connection with the proposed
termination of the Delegation Agreement; (iv) amend the Operating
Agreement to establish a Director Candidate Recommendation Committee
(``DCRC'') as a committee of the Board and set forth the process by
which Non-Affiliated Director Candidates are named to the new DCRC; (v)
amend the Operating Agreement to establish a Committee for Review
(``CFR'') as a subcommittee of the ROC and make conforming changes to
Exchange Rules 308, 475, 476, 476A, and 9310; and (vi) replace
references to the Chief Executive Officer of NYSE Regulation in
Exchange Rules 48, 49, and 89 with references to the Chief Regulatory
Officer of the Exchange.
A. Establishing a ROC and Making Conforming Amendments to Exchange
Rules
The Exchange proposes to add subsection (ii) to Section 2.03(h) of
the Operating Agreement to establish a ROC and to delineate its
composition and functions. The Exchange states that new Section
2.03(h)(ii) of the Operating Agreement would be substantially similar
to the recently approved changes by the Exchange's affiliates, NYSE
Arca, Inc. (``NYSE Arca'') and NYSE MKT LLC (``NYSE MKT''), to
establish ROCs,\8\ as well as Article III, Section 5(c) of the By-Laws
of the NASDAQ Stock Market LLC (``NASDAQ'') (``NASDAQ By-Laws'').\9\
The ROC would be appointed annually and would have the following
responsibilities:
---------------------------------------------------------------------------
\8\ See Securities Exchange Act Release Nos. 75148 (June 11,
2015), 80 FR 34751 (June 17, 2015) (approving NYSE MKT's
establishment of a ROC of the exchange's Board of Directors) (``NYSE
MKT Approval Order'') and 75155 (June 11, 2015), 80 FR 34744 (June
17, 2015) (approving NYSE Arca's establishment of a ROC of the
exchange's Board of Directors) (``NYSE Arca Approval Order'').
\9\ See Securities Exchange Act Release No. 53128 (January 13,
2006), 71 FR 3550 (January 23, 2006) (order granting application of
NASDAQ for registration as a national securities exchange) (``NASDAQ
Approval Order'').
---------------------------------------------------------------------------
Oversee the Exchange's regulatory and self-regulatory
organization responsibilities and evaluate the adequacy and
effectiveness of the Exchange's regulatory and self-regulatory
organization responsibilities;
assess the Exchange's regulatory performance; and
advise and make recommendations to the Board or other
committees of the Board about the Exchange's regulatory compliance,
effectiveness and plans.\10\
---------------------------------------------------------------------------
\10\ See Notice, supra note 4, at 37317.
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In furtherance of these functions, the Exchange proposes that the
ROC shall have the authority and obligation to: (i) Review the
regulatory budget of the Exchange and specifically inquire into the
adequacy of resources available in the budget for regulatory
activities; (ii) meet regularly with the Chief Regulatory Officer
(``CRO'') in executive session; (iii) in consultation with the
Exchange's Chief Executive Officer, establish the goals, assess the
performance, and recommend the CRO's compensation; and (iv) keep the
Board informed with respect to the foregoing matters.
With respect to the ROC's composition, Section 2.03(h)(ii) would
provide that the ROC shall consist of at least three members, each of
whom shall be a Director of the Exchange who satisfies the independence
requirements of the Exchange.\11\ The Exchange states that a ROC
comprised of at least three independent members has been recognized as
one of several measures that can help ensure the independence of the
regulatory function from the market operations and commercial interests
of a national securities exchange.\12\
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\11\ The Exchange's independence requirements are set forth in
the Company Director Independence Policy of the Exchange. See
Securities Exchange Act Release No. 67564 (August 1, 2012), 77 FR
47161 (August 7, 2012) (SR-NYSE-2012-17) (approving, among other
things, the Exchange's Company Director Independence Policy).
\12\ See Notice, supra note 4, at 37317.
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In addition, Section 2.03(h)(ii) of the Operating Agreement would
provide that the Board, on affirmative vote of a majority of Directors,
at any time may remove a member of the ROC for cause, and also would
provide that a failure of the ROC member to qualify as independent
under the Company Director Independence Policy would constitute a basis
to remove a member of the ROC for cause. If the term of office of a ROC
member terminates, and the remaining term of office of such member at
the time of termination is not more than three months, Section
2.03(h)(ii) would provide that during the period of vacancy, the ROC
would not be deemed to be in violation of its compositional
requirements by virtue of the vacancy. To clarify the process for
filling vacancies on any committee of the Exchange, including the ROC,
the Exchange also proposes to amend Section 2.03(h) of the Operating
Agreement to provide that vacancies in the membership of any committee
shall be filled by the Board. The Exchange believes that the proposed
rule change creating an independent Board committee to oversee the
adequacy and effectiveness of the performance of its self-regulatory
responsibilities is consistent with previously approved rule changes
for other SROs and would enable the Exchange to undertake its
regulatory responsibilities under a corporate governance structure that
is consistent with its industry peers.\13\ Moreover, the Exchange
believes that the proposed ROC would ensure the continued independence
of the regulatory process.\14\ The Exchange states that oversight of
the Exchange's self-regulatory responsibilities and regulatory
performance, including review of the regulatory plan, programs, budget
and staffing by a ROC composed of individuals independent of Exchange
[[Page 59839]]
management and a CRO having general supervision of the regulatory
operations of the Exchange that meets regularly with the ROC is
integral to the proposal.\15\
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\13\ See id. See also NASDAQ Approval Order, NYSE MKT Approval
Order and NYSE Arca Approval Order, supra notes 8 and 9.
\14\ See Notice, supra note 4, at 37317.
\15\ See id.
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The Exchange also proposes to make conforming amendments to
Exchange Rules 1, 46, 46A and 497 by replacing references to ``Board of
Directors of NYSER'' and ``NYSE Regulation Board of Directors'' with
references to the ROC.
B. Terminating the Delegation Agreement, Deleting Exchange Rule 20, and
Conforming the Operating Agreement and Other Exchange Rules
The Exchange proposes to terminate the Delegation Agreement and
delete Exchange Rule 20, which sets forth the delegation of the
Exchange's regulatory functions to NYSE Regulation and the Exchange's
market functions to NYSE Market (DE),\16\ each of which is a subsidiary
of the Exchange created in 2006 following the merger of New York Stock
Exchange, Inc. with Archipelago Holdings, Inc.\17\ In connection with
that transaction, NYSE Regulation became a separate not-for-profit
entity, and its Board of Directors assumed the regulatory oversight
functions and responsibilities of the Exchange that are proposed to be
assumed by the ROC. The Exchange notes that, although the Delegation
Agreement sets forth the terms under which the Exchange delegated its
functions to NYSE Regulation and NYSE Market (DE), the Exchange
retained ultimate responsibility for the operations, rules and
regulations developed by NYSE Regulation and NYSE Market (DE) and for
their enforcement.\18\
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\16\ See Exchange Rule 20(a). Exchange Rule 20(b) requires that
NYSE Market (DE) establish a Market Performance Committee and that
NYSE Regulation establish a Regulatory Advisory Committee, each to
include persons associated with member organizations and
representatives of both those member organizations doing business on
the Floor of the Exchange and those who do not do business on the
Floor. The Exchange does not propose to retain these committees.
Rather, the Exchange proposes that the Committee for Review, which
would include persons associated with member organizations and
representatives of both those member organizations doing business on
the Floor of the Exchange and those who do not do business on the
Floor, assume the advisory roles of these committees. See Section
II.E., infra.
\17\ See Notice, supra note 4, at 37318.
\18\ The Exchange notes that functions delegated to NYSE Market
(DE) included, among other things, operating the NYSE marketplace,
including the automated systems supporting it; providing and
maintaining a communications network infrastructure linking market
participants for the efficient process and handling of quotations,
orders, transaction reports and comparisons of transactions; acting
as a Securities Information Processor for quotations and transaction
information related to securities traded on NYSE and other trading
facilities operated by NYSE Market (DE); administering the
Exchange's participation in National Market System Plans; and
collecting, processing, consolidating and providing to NYSE
Regulation accurate information requisite to operation of the
surveillance audit trail. See id. at 37318 n.21.
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With the termination of the Delegation Agreement, the Exchange
proposes to re-integrate its regulatory and market functions.\19\ The
Exchange believes that its proposal to establish a ROC to undertake the
independent oversight of the Exchange's regulatory responsibilities
would ensure independent oversight of the regulatory process and would
have the additional benefit of aligning the Exchange's corporate
governance practices with its industry peers.\20\
---------------------------------------------------------------------------
\19\ See Notice, supra note 4, at 37322.
\20\ See id. at 37318.
---------------------------------------------------------------------------
The Exchange proposes to functionally separate its regulatory
functions from its business lines.\21\ The Exchange's CRO would head
the Exchange's regulatory department and continue to manage the
Exchange's regulatory functions, under the oversight of the proposed
ROC. The regulatory staff supporting the regulatory functions of NYSE
would report to the CRO. The Exchange believes that a CRO reporting to
an independent ROC should add a ``significant degree of independence''
and should ``insulate'' regulatory activity from economic pressures and
potential conflicts of interest.\22\
---------------------------------------------------------------------------
\21\ See id.
\22\ See id. (citing Securities Exchange Act Release No. 48946
(December 17, 2003), 68 FR 74678, 74687 (December 24, 2003)).
---------------------------------------------------------------------------
The Exchange proposes to make certain conforming amendments to its
Rules to reflect the termination of the Delegation Agreement and the
re-integration of its regulatory and market operations. As further
described in the Notice,\23\ the Exchange proposes conforming
amendments in Section 4.05 of the Exchange's Operating Agreement, and
Exchange Rules 0, 1, 22, 36 (Supplementary Material .30), 37, 46, 48,
49, 54(b), 70 (subparts (1) and (7) of Supplementary Material .40),
103, 103A, 103B, 104, 422, 476A and 497, by removing references to NYSE
Regulation and NYSE Market \24\ and, where applicable, replacing such
deletions with references to the Exchange or to the applicable Exchange
personnel, as appropriate, who will be carrying out the regulatory
responsibilities on behalf of the Exchange following the termination of
the Delegation Agreement.
---------------------------------------------------------------------------
\23\ See id. at 37318-19.
\24\ The Exchange notes that NYSE Market (DE) was formerly known
as ``NYSE Market, Inc.'' Accordingly, references to ``NYSE Market''
in the Exchange Rules and Operating Agreement are references to NYSE
Market (DE).
---------------------------------------------------------------------------
C. Deleting NYSE Market (DE) and NYSE Regulation's Organizational
Documents as Rules of the Exchange
With the termination of the Delegation Agreement, NYSE Regulation
and NYSE Market (DE) no longer would be performing the Exchange's
regulatory and market functions, respectively. According to the
Exchange, the previously filed constituent documents of NYSE Regulation
and NYSE Market (DE) therefore no longer would constitute ``rules of
[the] exchange'' under Section 3(a)(27) of the Act.\25\ As a result,
the Exchange proposes to remove the following NYSE Regulation and NYSE
Market (DE) constituent documents as rules of the Exchange upon
termination of the Delegation Agreement:
---------------------------------------------------------------------------
\25\ 15 U.S.C. 78c(a)(27).
---------------------------------------------------------------------------
Restated Certificate of Incorporation of NYSE Regulation,
Inc.;
Seventh Amended and Restated Bylaws of NYSE Regulation,
Inc.;
Independence Policy of NYSE Regulation, Inc.;
Third Amended and Restated Certificate of Incorporation of
NYSE Market (DE), Inc.;
Fourth Amended and Restated Bylaws of NYSE Market (DE),
Inc.; and
Independence Policy of NYSE Market (DE), Inc.\26\
---------------------------------------------------------------------------
\26\ The Commission notes that on September 22, 2015, NYSE MKT
LLC filed a proposed rule change to add the Third Amended and
Restated Certificate of Incorporation of NYSE Market (DE), Inc. and
the Eighth Amended and Restated Operating Agreement of New York
Stock Exchange LLC as ``rules of [the] exchange'' of NYSE MKT in
light of NYSE Market (DE), Inc.'s majority ownership interest in a
facility of NYSE MKT. See Securities Exchange Act Release No. 75984
(September 25, 2015) (SR-NYSEMKT-2015-71).
---------------------------------------------------------------------------
D. Establishing a DCRC and Naming Non-Affiliated Director Candidates
Section 2.03(a)(iii) of the Operating Agreement provides that Non-
Affiliated Director Candidates (also known as ``Fair Representation
Candidates'') are nominated by the nominating and governance committee
(``NGC'') of the Intercontinental Exchange, Inc. (``ICE'') Board of
Directors, which must designate as Non-Affiliated Director Candidates
the candidates recommended jointly by the NYSE Market (DE) DCRC and the
NYSE Regulation DCRC. Section 2.03(a)(iv) of the Operating Agreement
describes the process whereby member organizations can nominate
alternate candidates to those candidates selected by the NYSE Market
(DE) DCRC and the NYSE Regulation DCRC.
[[Page 59840]]
The Exchange proposes to establish a NYSE DCRC as a committee of
the Board by adding new subsection (h)(i) to Section 2.03 of the
Operating Agreement, and making conforming changes to Section
2.03(a)(iii) and Section 2.03(a)(iv) by substituting the proposed NYSE
DCRC for the NYSE Market (DE) DCRC and NYSE Regulation DCRC in the
nominating process for Non-Affiliated Director Candidates. The Exchange
states that, once the Delegation Agreement is terminated, neither the
NYSE Market (DE) DCRC nor the NYSE Regulation DCRC should have a role
in the nomination of Non-Affiliated Director Candidates process, as the
Exchange no longer would be delegating any market or regulatory
responsibilities to either entity.\27\
---------------------------------------------------------------------------
\27\ See Notice, supra note 4, at 37320.
---------------------------------------------------------------------------
Proposed Section 2.03(h)(i) of the Operating Agreement provides
that the Board would appoint the members of the NYSE DCRC on an annual
basis and that the NYSE DCRC would be responsible for recommending Non-
Affiliated Director Candidates to the ICE NGC. Proposed Section
2.03(h)(i) also sets forth the compositional requirements for the NYSE
DCRC.\28\ Specifically, the NYSE DCRC would include individuals who are
associated with a member organization, and would include at least one
individual from each of the following categories, that:
---------------------------------------------------------------------------
\28\ The proposed requirements are substantially similar to the
requirements for the DCRCs of NYSE Regulation, NYSE Market (DE), and
NYSE MKT. See Seventh Amended and Restated Bylaws of NYSE
Regulation, Inc., Article III, Section 5; Fourth Amended and
Restated Bylaws of NYSE Market (DE), Inc., Article III, Section 5;
and Sixth Amended and Restated Operating Agreement of NYSE MKT LLC,
Section 2.03(h). The Exchange notes that NYSE MKT has a fourth
category of requirements similar to the third category noted above
but it includes an individual that engages in the execution of
transactions on NYSE MKT's trading floor for the associate person's
own account. Because neither the NYSE Market (DE) DCRC nor the NYSE
Regulation DCRC, which the NYSE DCRC is replacing, has this fourth
category, the Exchange does not propose to include it in the revised
Operating Agreement. See Notice, supra note 4, at 37320 n.37.
---------------------------------------------------------------------------
Engages in a business involving substantial direct contact
with securities customers;
is registered as a Designated Market Maker (``DMM'') and
spends a substantial part of their time on the trading floor; and
spends a majority of their time on the trading floor of
the Exchange and has as a substantial part of their business the
execution of transactions on the trading floor of the Exchange for
other than their own account or the account of his or her Member
Organization, but is not registered as a DMM.
As proposed, Section 2.03(h)(i) would provide that the Board
appoint such individuals after appropriate consultation with
representatives of member organizations. Furthermore, the Exchange
proposes to replace references to ``NYSE Market DCRC'' and ``NYSE
Regulation DCRC'' with ``NYSE DCRC'' in Section 2.03(a)(iii) and
Section 2.03(a)(iv) of the Operating Agreement.
According to the Exchange, one benefit of the proposed rule change
is that the Exchange's process for selecting Non-Affiliated Director
Candidates would be harmonized with a similar process in place at NYSE
MKT, an affiliate of the Exchange.\29\ Further, the Exchange believes
that the proposed rule change would allow the Board to have a more
direct role in the appointment of Non-Affiliated Director Candidates
while complying with the fair representation requirement under Section
6(b)(3) of the Act,\30\ which is intended to give members a voice in
the selection of an exchange's directors and the administration of its
affairs.\31\ In particular, the Exchange notes that, as is the case
with the NYSE Regulation DCRC and NYSE Market (DE) DCRC, the proposed
NYSE DCRC would be comprised of persons associated with Exchange member
organizations and selected after appropriate consultation with those
member organizations. The proposed Operating Agreement also retains a
process by which members could directly petition and vote for
representation on the Board.\32\ The Exchange therefore believes that
the proposal would continue to allow members to have a voice in the
Exchange's use of its self-regulatory authority, consistent with
Section 6(b)(3) of the Act.\33\
---------------------------------------------------------------------------
\29\ See Notice, supra note 4, at 37316.
\30\ See 15 U.S.C. 78f(b)(3).
\31\ See Notice, supra note 4, at 37320.
\32\ NYSE's Operating Agreement, Section 2.03(a)(iv).
\33\ See Notice, supra note 4, at 37320 and 15 U.S.C. 78f(b)(3).
---------------------------------------------------------------------------
E. Establishing a Committee for Review and Conforming Exchange Rules
The Exchange proposes to establish a Committee for Review (``CFR'')
as a subcommittee of the ROC by adding a new subsection (h)(iii) to
Section 2.03 of the Operating Agreement and to make conforming changes
to Exchange Rules 308, 475, 476, 476A, and 9310.\34\ The proposed CFR
would be the successor to the current CFR, which is a committee of NYSE
Regulation's Board of Directors.\35\ Section 2.03(h)(iii) of the
Operating Agreement would provide that the Board shall annually appoint
the members of the CFR. The Exchange notes that the proposed Section
2.03(h)(iii) of the Operating Agreement incorporates member
organization association requirements of the current CFR.\36\ The
proposed CFR would be comprised of both Exchange directors who satisfy
the NYSE's independence requirements as well as non-directors.\37\ The
Exchange notes that because the majority of the Board would be
independent and any Non-Affiliated Director must be independent, as a
functional matter if the Exchange were to have a five-person Board,
four of the five directors would qualify for CFR membership.\38\ Non-
directors serving on the proposed CFR would include representatives of
member organizations that engage in a business involving substantial
direct contact with securities customers (upstairs firms), DMMs, and
floor brokers.\39\ The Exchange notes that the proposed CFR, like the
current CFR, would be selected after appropriate consultation with
those members. The Exchange notes further that for any CFR vote, a
majority of the members of the CFR casting votes would have to be
directors of the Exchange.
---------------------------------------------------------------------------
\34\ See Notice, supra note 4, at 37320-21.
\35\ See id. at 37320.
\36\ See id. at 37321.
\37\ See id. at 37320-21.
\38\ See id. at 37320-21 n.42.
\39\ See id. at 37321.
---------------------------------------------------------------------------
The proposed CFR would be responsible for reviewing the
disciplinary decisions on behalf of the Board and reviewing
determinations to limit or prohibit the continued listing of an
issuer's securities on the Exchange.\40\ Additionally, the Exchange
proposes to incorporate the role of the Market Performance and
Regulatory Advisory Committees into the proposed CFR.\41\ As a result,
the proposed CFR would be charged with acting in an advisory capacity
to the Board with respect to disciplinary matters, the listing and
delisting of securities, regulatory
[[Page 59841]]
programs, rulemaking and regulatory rules, including trading rules. The
Exchange states that the proposed CFR would therefore serve in the same
advisory capacity as the Market Performance and Regulatory Advisory
Committees.\42\
---------------------------------------------------------------------------
\40\ The Exchange notes that these powers are currently set
forth in the charter of the NYSE Regulation CFR, which also states
that the CFR can provide general advice to the NYSE Regulation Board
of Directors in connection with disciplinary, listing and other
regulatory matters. The Exchange proposes to delineate the appellate
and advisory powers of the proposed CFR in Section 2.03(h)(iii) of
the Operating Agreement. Appeals of delisting determinations are
governed by Rule 804.00 of the Exchange's Listed Company Manual,
which provides that delisting determinations are to be reviewed by a
``Committee of the Board of Directors of the Exchange''. See Notice,
supra note 4, at 37321 n.44.
\41\ Id. at 37321. The Exchange notes that the same profile of
members who historically served on these advisory committees would
be represented on the proposed CFR. Id.
\42\ See Notice, supra note 4, at 37321.
---------------------------------------------------------------------------
According to the Exchange, member participation on the proposed CFR
would be sufficient to provide for the fair representation of members
in the administration of the affairs of the Exchange, including
rulemaking and the disciplinary process, consistent with Section
6(b)(3) of the Act.\43\
---------------------------------------------------------------------------
\43\ See id. and 15 U.S.C. 78f(b)(3).
---------------------------------------------------------------------------
Finally, the Exchange proposes to make conforming amendments to
Exchange Rules 308, 475, 476, 476A and 9310 by generally replacing
references to the current NYSE Regulation CFR with references to the
``Committee for Review.''
F. Modifying Exchange Rules To Reference the Exchange's Chief
Regulatory Officer
The Exchange also proposes to amend Exchange Rule 48 (Exemptive
Relief--Extreme Market Volatility Condition), Exchange Rule 49
(Emergency Powers) and Exchange Rule 86 (NYSE BondsSM) by replacing
references to the Chief Executive Officer of NYSE Regulation with
references to the CRO of the Exchange.
Exchange Rule 48 currently provides that, for purposes of the rule,
a ``qualified Exchange officer'' means the Chief Executive Officer of
ICE, or his or her designee, or the Chief Executive Officer of NYSE
Regulation, or his or her designee. Exchange Rule 48 provides that the
Exchange can invoke an extreme market volatility condition at the open
(or reopen of trading following a market-wide halt of securities)
during which time the Exchange could suspend Exchange Rules 15, 79A.30,
and 123D(1) regarding obtaining certain prior Floor Official approvals
and requirements for mandatory indications. Exchange Rule 49 addresses
the Exchange's emergency powers and defines the term ``qualified
Exchange officer'' as, inter alia, the ``NYSE Regulation, Inc. Chief
Executive Officer'' or his or her designee. Exchange Rule 86 currently
provides that Clearly Erroneous Execution panels in connection with
trades on NYSE MKT Bonds be comprised of the Chief Executive Officer of
NYSE Regulation or a designee and representatives from two members or
member organizations that are users of NYSE Bonds.\44\
---------------------------------------------------------------------------
\44\ NYSE Bonds is the Exchange's electronic bond trading
platform. Rule 86 prescribes what bonds are eligible to trade on the
NYSE Bonds platform and how bonds are traded on the platform,
including the receipt, execution and reporting of bond transactions.
See Notice, supra note 4, at 37321 n.50.
---------------------------------------------------------------------------
The Exchange notes that ``Chief Executive Officer'' of NYSE
Regulation is used in these three rules but CRO is used throughout the
Exchange's rules to designate the same person.\45\ The Exchange, thus,
proposes to replace references to ``Chief Executive Officer'' of NYSE
Regulation in Exchange Rules 48, 49 and 86 with either the term ``Chief
Regulatory Officer'' or ``CRO'', as appropriate.
---------------------------------------------------------------------------
\45\ See, e.g., Exchange Rules 13, 107B, 107C and 128.
---------------------------------------------------------------------------
As noted above, the Commission received one comment letter on the
proposed rule change.\46\ The commenter states that, with respect to
the existing system of the Exchange's governance, the proposed rule
change would replace a structural separation with a functional
separation, in particular, by terminating the Delegation Agreement and
establishing a ROC in lieu of NYSE Regulation.\47\ The commenter
expresses the concern that the Exchange's proposal would not ensure
sufficient insulation of the Exchange's regulatory function from the
commercial interests of its holding company.\48\ The commenter
enumerates the following specific concerns with the proposal: Unlike
NYSE Regulation, the Exchange is a ``for profit'' entity; NYSE
Regulation has a board consisting entirely of independent directors;
NYSE Regulation limits the number of directors from the holding company
who can sit on its board to less than a majority, while the Board could
include a super-majority of directors from the holding company; the ROC
would have little substantive authority and can only ``review'' the
regulatory budget and ``inquire'' about the adequacy of resources for
regulatory activities; the ROC would not be sufficiently insulated from
the business activities of the holding company because the ROC's
membership could be composed of persons who also are directors of the
holding company; the CRO position would not be adequately insulated
from the commercial interests of the holding company; and the CFR would
not effectively insulate the disciplinary review process from possible
commercial influences.\49\
---------------------------------------------------------------------------
\46\ See Professor Brown Letter, supra note 5.
\47\ Id. at 4-5.
\48\ Id. at 6.
\49\ Id. at 6-7.
---------------------------------------------------------------------------
The commenter offers a number of suggested revisions to the
proposed rule change that in his view would strengthen the independence
of the Exchange's regulatory function: The Board should consist
entirely of independent directors, other than the Chief Executive
Officer, and should not include any holding company directors or
directors of affiliates; the ROC should consist entirely of independent
directors; the ROC should have greater substantive authority over its
budget and other critical functions and should have greater authority
with respect to the CRO and the CRO's compensation; CFR membership
should be limited to members of the ROC and persons appointed by the
ROC; and the provision regarding removal of a director ``for cause''
should be defined so as to restrict the Board from easily changing the
ROC's membership.\50\ The commenter suggests that the Delegation
Agreement could remain in place and the Exchange could seek
modifications to, rather than replace, the existing governance
system.\51\
---------------------------------------------------------------------------
\50\ Id. at 8-9.
\51\ Id. at 8.
---------------------------------------------------------------------------
The Exchange submitted a letter responding to the commenter's
letter.\52\ The Exchange discusses each of the commenter's issues with
its proposal and the commenter's recommendations for revision.\53\ With
respect to the elimination of NYSE Regulation and the creation of a
ROC, the Exchange states that, as a self-regulatory organization
(``SRO''), it has always retained the ``ultimate responsibility for the
fulfillment of its statutory and self-regulatory obligations under the
Act.'' \54\ With respect to the composition of the ROC, the Exchange
notes that under the proposal the ROC would be required to be composed
of at least three members, each of whom would be required to be a
director of the Exchange that satisfies the independence requirements
of the Company Director Independence Policy, which, according to the
Exchange, is virtually identical to the NYSE Regulation Independence
Policy.\55\ The Exchange further states that its Operating Agreement
recently was amended to remove the requirement that the Board consist
of at least a majority of independent directors of the holding
company.\56\ In addition, the Exchange points out that its proposed ROC
was modeled on the NASDAQ
[[Page 59842]]
ROC and has the same powers and its responsibilities are substantially
similar to the ROCs of other SROs.\57\ The Exchange also notes that the
proposal ``clearly provides that the CRO would report to the ROC'' \58\
and, given that fact, the ROC ``clearly has the power to retain or
dismiss the CRO, only it must do so in consultation with the Exchange's
Chief Executive Officer as part of the process of establishing goals,
assessing performance, and recommending the CRO's compensation.'' \59\
---------------------------------------------------------------------------
\52\ See NYSE Response Letter, supra note 6.
\53\ Id.
\54\ Id.
\55\ Id.
\56\ Id. at 7 (citing Securities Exchange Act Release No. 75105
(June 4, 2015), 80 FR 33005 (June 10, 2015)).
\57\ Id. at 8.
\58\ Id.
\59\ Id. at 9.
---------------------------------------------------------------------------
The Exchange also addresses the commenter's suggested revisions to
the Exchange's proposal. As an initial matter, the Exchange states that
the commenter ``has not provided any credible reason why the current
structure should remain or why the Exchange's Proposal is not
consistent with the requirements of the Act.'' \60\ The Exchange does
not believe that directors that meet its independence standards are
less independent because they also serve as directors of ICE or ICE
affiliates.\61\ The Exchange further states that it ``rejects the
proposition that directors of NYSE Regulation are inherently more
independent than independent directors of ICE that serve as independent
directors of the Exchange.'' \62\ Regarding the commenter's suggestions
about the ROC, the Exchange reiterated its position that the proposed
ROC and its authority is consistent with prior exchanges' provisions
relating to ROCs that were found by the Commission to be consistent
with the Act.\63\ Regarding the commenter's suggestion that the CFR be
limited to members of the ROC and members appointed by the ROC, the
Exchange states its view that the requirement that members of the CFR
be independent directors of the Exchange is sufficient to ensure the
integrity of the disciplinary appeals process.\64\ With respect to the
commenter's suggestion that the proposal permitting removal of a ROC
member ``for cause'' be revised to limit the Board's ability to easily
change the ROC's membership, the Exchange notes that at least one SRO
does not require ``cause'' as a basis for removing a ROC member.\65\
---------------------------------------------------------------------------
\60\ Id. at 10.
\61\ Id.
\62\ Id.
\63\ Id. at 10-11.
\64\ Id. at 11.
\65\ Id.
---------------------------------------------------------------------------
III. Discussion and Commission Findings
After careful review, 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.\66\ In
particular, the Commission finds that the proposed rule change is
consistent with Section 6(b)(1) of the Act, which requires an exchange
to be so organized and have the capacity to carry out the purposes of
the Act and to comply, and to enforce compliance by its members and
persons associated with its members, with the Act, the rules and
regulations thereunder, and the rules of the exchange.\67\ The
Commission finds that the proposal also is consistent with the
requirements of Section 6(b)(3) of the Act, which provides that the
rules of an exchange must assure a fair representation of its members
in the selection of its directors and administration of its affairs and
provide that one or more directors shall be representative of issuers
and investors and not be associated with a member of the exchange,
broker, or dealer.\68\ In addition, the Commission finds that the
proposal is consistent with Section 6(b)(5) of the Act, which requires
that the rules of the exchange be 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.\69\
Finally, the Commission finds that the proposal is consistent with
Section 6(b)(6) of the Act, which requires that the rules of the
exchange provide that its members and persons associated with its
members shall be appropriately disciplined for violation of the
provisions of the Act, the rules or regulations thereunder, or the
rules of the exchange.\70\
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\66\ In approving this proposed rule change, the Commission
notes that it has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
\67\ 15 U.S.C. 78f(b)(1).
\68\ 15 U.S.C. 78f(b)(3).
\69\ 15 U.S.C. 78f(b)(5).
\70\ 15 U.S.C. 78f(b)(6).
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As noted above, the commenter expresses the concern that the
Exchange's proposal would not ensure sufficient insulation of the
Exchange's regulatory function from the commercial interests of its
holding company.\71\ The commenter also questions the adequacy of the
independence of the directors of the Exchange's Board.\72\ In response,
the Exchange states that the commenter has not provided an adequate
reason why the Exchange's current structure should remain or why the
proposal is not consistent with the requirements of the Act.\73\
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\71\ See Professor Brown Letter, supra note 5, at 6.
\72\ Id.
\73\ See NYSE Response Letter, supra note 6, at 10.
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As a preliminary matter, the Commission notes that several concerns
raised by the commenter relate to the fact that the Exchange is part of
a holding company structure. In that regard, the commenter suggests
that the replacement of NYSE Regulation with the ROC would not provide
sufficient insulation of the Exchange's regulatory functions from the
commercial interests of the holding company.\74\ The Commission notes
that, although the Exchange may be part of a holding company structure,
the Exchange is obligated to satisfy its self-regulatory obligations
under the Act and rules and regulations thereunder.\75\ The Commission
believes that the regulatory structure proposed by the Exchange is
consistent with the Act and the rules and regulations thereunder, and
is substantially similar to regulatory structures that were approved by
the Commission for other exchanges.\76\ In addition, contrary to the
commenter's understanding that the Operating Agreement ``requires that
the Board consist of at least a majority of independent directors from
the holding company,'' \77\ the Operating Agreement no longer contains
such a requirement pursuant to amendments to the Operating Agreement
that recently were approved by the Commission.\78\ The Commission notes
that the Operating Agreement also requires that the Board consist of a
majority of directors that satisfy the Company Director Independence
Policy.\79\
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\74\ See Professor Brown Letter, supra note 5, at 6-7.
\75\ The Commission previously has stated that there is no
``overriding regulatory reason to require exchanges to be not-for-
profit membership organizations.'' See Securities Exchange Act
Release No. 40760 (December 8, 1998), 63 FR 70844, 70880 (December
22, 1988) (``Regulation ATS Adopting Release''). In the Regulation
ATS Adopting Release, the Commission also noted that ``it is
possible for a for-profit exchange to meet the standards set forth
in Section 6(b) of the Exchange Act.'' Id.
\76\ See NASDAQ Approval Order, NYSE MKT Approval Order and NYSE
Arca Approval Order, supra notes 8 and 9.
\77\ See Professor Brown Letter, supra note 5, at 6.
\78\ See Securities Exchange Act Release No. 75105 (June 4,
2015), 80 FR 33005 (June 10, 2015).
\79\ NYSE's Operating Agreement, Section 2.03(a)(i).
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The commenter expresses the view that the ROC would not have
sufficient substantive authority over the
[[Page 59843]]
Exchange's regulatory program.\80\ In response, the Exchange states
that the ROC was modeled on the NASDAQ ROC and has the same powers,
including the power to review the regulatory budget and inquire about
available regulatory resources.\81\ The Commission believes that the
Exchange's proposal to establish a ROC, as an independent committee of
the Exchange to oversee the adequacy and effectiveness of the
Exchange's regulatory operations, should help the Exchange to fulfill
its statutory obligation to comply, and to enforce compliance by its
members and persons associated with its members, with the Act, the
rules and regulations thereunder, and the rules of the Exchange.\82\ In
addition, the Commission believes that the composition of the ROC,
which would consist of at least three members of the Board that satisfy
the Company Director Independence Policy, should help ensure the
independence of the regulatory function of the ROC. The Commission also
believes that the Exchange's proposal to make conforming changes to
various Exchange Rules to reflect the creation of the ROC is
appropriate.\83\ The Commission therefore finds that the proposed
provisions relating to the ROC and its composition are consistent with
the Act, including Sections 6(b)(1) and 6(b)(5) of the Act.
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\80\ See Professor Brown Letter, supra note 5, at 7.
\81\ See NYSE Response Letter, supra note 6, at 8.
\82\ The Commission notes that, under proposed Section
2.03(h)(ii) of the Operating Agreement, the responsibilities,
enumerated functions, and authority of the ROC are substantially
similar to those of other exchanges. See NASDAQ Approval Order, NYSE
MKT Approval Order and NYSE Arca Approval Order, supra notes 8 and
9.
\83\ See Notice, supra note 4, at 37317-18.
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The commenter also raises a concern about the proposed functional
separation, rather than the existing structural separation, between the
Exchange's regulatory and market functions that would result from the
Exchange's proposal to terminate the Delegation Agreement and delete
Exchange Rule 20.\84\ In response, the Exchange states that the
Commission's prior approval of its current regulatory structure would
not preclude alternative regulatory structures, such as a functional
separation, that also would be consistent with the Act.\85\ The
Commission believes that the Exchange's proposal to re-integrate its
regulatory and market functions into the Exchange, rather than to
continue to have certain regulatory and market duties performed by its
subsidiaries, NYSE Regulation and NYSE Market, respectively, is
consistent with the Act, and thus it is appropriate for the Exchange to
terminate the Delegation Agreement and delete Exchange Rule 20,
particularly in light of the Exchange's proposal to establish a ROC.
The Commission notes that under the Delegation Agreement, the Exchange
ultimately was responsible for fulfilling the self-regulatory
obligations delegated to NYSE Regulation and NYSE Market (DE).\86\
Thus, upon termination of the Delegation Agreement and deletion of
Exchange Rule 20, the Exchange's regulatory responsibilities would
remain unchanged; the major difference would be that the Exchange
itself would directly carry out the regulatory responsibilities and
market operations previously performed by its subsidiaries. The
Commission also finds that it is consistent with the Act for the
Exchange to make conforming changes to Exchange Rules to reflect the
termination of the Delegation Agreement and deletion of Exchange Rule
20.\87\
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\84\ See Professor Brown Letter, supra note 5, at 6.
\85\ See NYSE Response Letter, supra note 6, at 4.
\86\ See Delegation Agreement, Section I.
\87\ See Notice, supra note 4, at 37318-19.
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The commenter further states that the CFR would not effectively
insulate the disciplinary review process from the possibility of
commercial influences and expresses concern about the composition of
the CFR.\88\ In response, the Exchange states that the CFR would be
appointed annually by the Board as a subcommittee of the ROC and would
be comprised of both Exchange directors who satisfy the Company
Director Independence Policy as well as member participants.\89\
According to the Exchange, the CFR's mandate would include acting in an
advisory capacity to the Board with respect to disciplinary matters,
the listing and delisting of securities, regulatory programs, and
rulemaking and regulatory rules, including trading rules.\90\ The
Commission believes that the Exchange's proposal to establish a CFR is
appropriate and would provide for the fair representation of members in
the administration of the Exchange's affairs, and also would help
enable the Exchange to ensure that members and persons associated with
its members shall be appropriately disciplined for violations of the
provisions of the Act, the rules or regulations thereunder, or the
rules of the Exchange.\91\ The Commission therefore finds that the
proposed provisions relating to the CFR are consistent with the Act,
including Sections 6(b)(3) and 6(b)(6) thereunder.\92\
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\88\ See Professor Brown Letter, supra note 5, at 7.
\89\ See NYSE Response Letter, supra note 6, at 4.
\90\ Id.
\91\ 15 U.S.C. 78f(b)(3) and 15 U.S.C. 78(b)(6).
\92\ Id.
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The Commission believes that the Exchange's proposal to create the
NYSE DCRC as a committee of the Board that would recommend to the ICE
NGC the Non-Affiliated Director candidates to serve on the Board, in
place of the NYSE Regulation DCRC and the NYSE Market DCRC, provides an
appropriate process for the nomination of Exchange members to serve on
the Board. The Commission believes that the composition of the NYSE
DCRC, along with the provision in the Operating Agreement that would
allow members to directly nominate Non-Affiliated Director candidates
through a petition process,\93\ and the requirement that NYSE Group,
Inc. must appoint or elect as the Non-Affiliated Directors those
candidates nominated by the ICE NGC (or designate as Non-Affiliated
Directors the candidates that emerge from the petition and voting
process), should help to ensure the fair representation of members in
the selection of the Exchange's directors. Thus the Commission finds
that the proposal to establish the NYSE DCRC is consistent with the
Act, including Section 6(b)(3) thereunder.\94\
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\93\ NYSE's Operating Agreement, Section 2.03(a)(iv).
\94\ 15 U.S.C. 78f(b)(3).
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Finally, the Commission believes that it is consistent with the Act
for the Exchange to make conforming revisions to various Exchange Rules
to reflect the proposed changes to its governance structure. In this
regard, the Commission believes that it is appropriate for the Exchange
to delete the organizational documents of NYSE Regulation and NYSE
Market (DE) and to replace references to the Chief Executive Officer of
NYSE Regulation with references to the CRO in Exchange Rules 48, 49,
and 86.
IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change (SR-NYSE-2015-27) is approved.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\95\
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\95\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-24971 Filed 10-1-15; 8:45 am]
BILLING CODE 8011-01-P
