[Federal Register Volume 73, Number 90 (Thursday, May 8, 2008)]
[Notices]
[Pages 26159-26170]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-10093]
[[Page 26159]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-57757; File No. SR-BSE-2008-23]
Self-Regulatory Organizations; Boston Stock Exchange,
Incorporated; Notice of Filing of Proposed Rule Change Relating to the
Acquisition of the Boston Stock Exchange, Incorporated by The NASDAQ
OMX Group, Inc.
May 1, 2008.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on April 21, 2008, the Boston Stock Exchange, Incorporated
(``Exchange'' or ``BSE'') filed with the Securities and Exchange
Commission (``Commission'') the proposed rule change as described in
Items I, II, and III below, which Items have been substantially
prepared by the Exchange. The Commission is publishing this notice to
solicit comments on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes: (i) To amend and restate its Certificate of
Incorporation and its Constitution in their entirety to reflect the
planned acquisition of the Exchange by The NASDAQ OMX Group, Inc.
(``NASDAQ OMX''); (ii) to redesignate its Constitution as the By-Laws
of the Exchange (``By-Laws''); (iii) to amend the governance framework
of Boston Options Exchange Regulation, LLC (``BOXR'') by adopting a
written operating agreement and amending the BOXR by-laws (``BOXR By-
Laws''); (iv) to obtain approval for a change of control of BSX Group,
LLC (``BSX'') and make related amendments to the Third Amended and
Restated Operating Agreement of BSX; (v) to adopt two related rules;
and (vi) to obtain Commission approval for affiliation between the
Exchange and certain broker-dealer subsidiaries of NASDAQ OMX. The text
of the proposed rule change is available on the Exchange's Web site
(http://www.bostonstock.com), at the Exchange, and at the Commission's
Public Reference Room. The text of Exhibit 5 of the proposed rule
change is also available on the Commission's Web site (http://www.sec.gov/rules/sro.shtml).
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of, and basis for, the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
Sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Merger
On October 2, 2007, the Exchange announced that it had entered into
an agreement with The Nasdaq Stock Market, Inc. (now NASDAQ OMX)
pursuant to which NASDAQ OMX will acquire all of the outstanding
membership interests in the Exchange and the Exchange will be merged
with and into Yellow Merger Corporation, a Delaware corporation and
wholly owned subsidiary of NASDAQ OMX, with the Exchange surviving the
merger (``Merger''). As a result of the Merger, the Exchange will
become a Delaware stock corporation, with 100% of its outstanding stock
owned by NASDAQ OMX. Exchange Members will receive cash as
consideration for their ownership interests, and therefore will not
retain ownership interests in the Exchange or its affiliates. NASDAQ
OMX will then operate the Exchange as a wholly owned subsidiary, with
rules, membership rosters, and listings that are separate and distinct
from the rules, membership rosters, and listings of The NASDAQ Stock
Market LLC (``Nasdaq Exchange''). The Exchange will propose substantial
amendments to its rules in a separate filing.
To reflect its changed status from an independent membership
corporation to a wholly owned stock corporation, the Exchange proposes
to amend and restate its Certificate of Incorporation and its
Constitution in their entirety. The amended Constitution will be
redesignated as the By-Laws of the Exchange. In addition, the Exchange
proposes to adopt two new rules to reflect its status as a subsidiary
of NASDAQ OMX, which is a public company.
The Exchange also proposes to amend the governance framework of
BOXR by adopting a written operating agreement (the Amended and
Restated Limited Liability Company Agreement of Boston Options Exchange
Regulation, LLC (``BOXR LLC Agreement'')) and amending the BOXR By-
Laws. BOXR is a wholly owned subsidiary of the Exchange that regulates
the Boston Options Exchange (``BOX''), an electronic options market
operated as a facility of the Exchange by Boston Options Exchange Group
LLC (``BOX LLC''). BOX LLC was established in 2002 as a joint venture
among the Exchange, Bourse de Montr[eacute]al (``MX''), and several
other investors. The Exchange has agreed to sell its equity interest in
BOX LLC to MX, but the Exchange will continue to regulate BOX through
BOXR for a period of time following the Merger. BOXR's operations are
governed by a Plan of Delegation of Functions and Authority by the
Exchange to BOXR and by its by-laws, both of which are rules of the
Exchange approved by the Commission. The BOXR LLC Agreement, and the
BOXR By-Law amendments reflect changes that will be made to the
governance and management of BOXR as it remains the designated entity
that will regulate the BOX market until alternative arrangements
acceptable to the Commission are made. The amendments to the BOXR By-
Laws also make technical amendments to conform to the changes proposed
to the Exchange Constitution.\3\
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\3\ In a separate filing (SR-BSE-2008-27), the Exchange is
proposing to amend the BOX LLC Operating Agreement and to adopt
resolutions establishing an independent committee of the Exchange's
Board of Governors (to be redesignated as the Board of Directors)
that will review BOX rule changes and certain other BOX-related
regulatory matters. In addition, the Exchange has submitted a filing
to amend the Exchange's Certificate to allow for the distribution of
the net proceeds from the Exchange's intended sale of its equity
interests in BOX (SR-BSE-2008-02).
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Finally, under Section 8.1 of the Third Amended and Restated
Operating Agreement of BSX dated March 13, 2007 (``BSX Operating
Agreement''), the Exchange must obtain Commission approval for certain
transfers of ownership interests in BSX. In connection with the Merger,
NASDAQ OMX will acquire direct interests in BSX, which, together with
the Exchange's interests, will result in BSX becoming a wholly owned
subsidiary of NASDAQ OMX. Specifically, following the Merger, the
Exchange will continue to own ``Units'' of ownership interest in BSX
equivalent to 53.21% of the outstanding Units, while NASDAQ OMX will
own the remaining 46.79%.
[[Page 26160]]
Accordingly, the filing seeks approval for this transfer. The filing
also proposes amendments to the BSX Operating Agreement to reflect
BSX's acquisition.
Exchange Certificate of Incorporation
Article First and Second of the amended and restated Certificate
(as proposed to be amended and restated, the ``Restated Certificate'')
state the name and registered agent of the Exchange. Although NASDAQ
OMX may propose to change the name of the Exchange in the future, at
closing, the name of the Exchange will remain ``Boston Stock Exchange,
Incorporated.''
Article Third of the Restated Certificate provides that the
Exchange may engage in any lawful act or activity for which
corporations may be organized under the General Corporation Law of the
State of Delaware and any and all activities necessary or incidental to
the foregoing. Without limiting these general powers, Article Third
also specifically provides that the Exchange's activities shall include
actions that support its regulatory responsibilities under the Act.\4\
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\4\ In a separate filing (SR-NASDAQ-2008-035), NASDAQ OMX is
proposing to amend its by-laws to reflect the proposed acquisition
of the Exchange. The proposed amendments include, among other
protections, a stipulation that for so long as NASDAQ OMX shall
control the Exchange, the board of directors, officers, employees
and agents of NASDAQ OMX shall give due regard to the preservation
of the independence of the self-regulatory function of the Exchange
and to its obligations to investors and the general public and shall
not take any actions which would interfere with the effectuation of
any decisions by the board of directors of the Exchange relating to
its regulatory functions (including disciplinary matters) or the
market structure which it regulates or which would interfere with
the ability of the Exchange to carry out its responsibilities under
the Act.
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Article Fourth of the Restated Certificate provides that the
Exchange is authorized to issue 1,000 shares of common stock, par value
$0.01, all of which shall be held by NASDAQ OMX. The Restated
Certificate further provides that NASDAQ OMX may not transfer or assign
any shares of stock of the Exchange, in whole or in part, to any
entity, unless such transfer or assignment shall be filed with and
approved by the Commission under Section 19 of the Act and the rules
promulgated thereunder.
Article Fifth pertains to the governing board of the Exchange,
which is being designated as a Board of Directors (``Board''), rather
than a Board of Governors. The total number of Directors constituting
the entire Board will be fixed from time to time by the stockholders
(i.e., NASDAQ OMX), and will be elected by the stockholders to hold
office until their respective successors have been duly elected and
qualified, subject, however, to prior death, resignation, retirement,
disqualification, or removal from office. However, the exact
composition of the Board is also subject to the requirements of the By-
Laws relating to independence and fair representation of members, which
are described in detail below.
Article Fifth also contains standard corporate provisions governing
meetings of stockholders. Because NASDAQ OMX will be the sole
stockholder, however, Article Seventh provides that any action required
or permitted to be taken at an annual or special meeting of
stockholders may be taken without a meeting, without prior notice and
without a vote, if a consent in writing, setting forth the action so
taken, is signed by the holders of outstanding stock having not less
than the minimum number of votes that would be necessary to authorize
or take such action at a meeting at which all shares entitled to vote
thereon were present and voted. Thus, it is expected that most
stockholder actions will be taken through written consent, rather than
meetings.
Finally, Article Fifth provides that vacancies or newly created
directorships resulting from an increase in the authorized number of
Directors are filled as provided in the By-Laws (described below); that
no decrease in the number of Directors shortens the term of an
incumbent Director; and that Directors may be removed by the holders of
a majority of the shares at the time entitled to vote at an election of
Directors. However, the stockholders' removal authority is also limited
by the By-Laws (as described below).
Article Sixth limits the liability of Directors to the Exchange in
the manner permitted under Delaware law; and Article Eighth provides
that the Board (in addition to the stockholders) may adopt, amend or
repeal By-Laws. Article Ninth reserves the right to amend, alter,
change, or repeal any provisions contained in the Restated Certificate;
\5\ and Article Tenth provides that the Exchange has perpetual
existence.
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\5\ All such changes must be filed with the Commission under
Section 19(b) of the Act, 15 U.S.C. 78s(b), and become effective
thereunder before being implemented.
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By-Laws
The By-Laws reflect NASDAQ OMX's expectation that the Exchange will
be operated with governance, regulatory, and market structures similar
to those of the Nasdaq Exchange. Accordingly, the Exchange proposes to
adopt By-Laws that are similar in all material respects to the By-Laws
of the Nasdaq Exchange. The most significant differences result from
the fact that the Nasdaq Exchange is a limited liability company
whereas the Exchange will be organized as a stock corporation.
Article I of the By-Laws contains key definitions used in the By-
Laws. Article II provides for the registered office of the Exchange in
Delaware and such other offices as it may establish. Article III
contains standard corporate provisions governing meetings of
stockholders, as well as a provision consistent with the Restated
Certificate allowing stockholder action by written consent.
Article IV contains key provisions regarding the powers,
composition, and selection of the Board. The property, business, and
affairs of the Exchange will be managed under the direction of the
Board. The exact number of Directors will be determined by the
stockholders of the Exchange (i.e., NASDAQ OMX), but shall in no event
be less than ten Directors. No decrease in the number of Directors
shall shorten the term of any incumbent Director.
As is the case with the Nasdaq Exchange, the Board composition will
be required to reflect a balance among ``Industry Directors,'' ``Member
Representative Directors,'' and ``Non-Industry Directors,'' including
``Public Directors.'' An Industry Director is a person with direct ties
to the securities industry as a result of connections to a broker-
dealer, the Exchange or its affiliates, the Financial Industry
Regulatory Authority, Inc. (``FINRA''), or certain service providers to
such entities.\6\ The By-Laws also permit up to
[[Page 26161]]
two officers of the Exchange, who would otherwise be considered
Industry Directors, to be designated as ``Staff Directors'' and thereby
be excluded from the definition of Industry Director. With the
exception of the initial Member Representative Directors, Member
Representative Directors are nominated by a Member Nominating Committee
composed of registered representatives of Exchange Members, or are
voted upon by Exchange Members.\7\ A Member Representative Director
may, but is not required to be, an officer, director, employee, or
agent of an Exchange Member. The process for election of Member
Representative Directors is described in greater detail below. A Non-
Industry Director is a Director (excluding Staff Directors) who is: (i)
A Public Director; (ii) an officer or employee of an issuer of
securities listed on the Exchange; or (iii) any other individual who
would not be an Industry Director. A Public Director is a Director who
has no material business relationship with a broker or dealer, the
Exchange or its affiliates, or FINRA. With the exception of the initial
Directors, Directors other than the Member Representative Directors are
nominated by a Nominating Committee appointed by the Board and are then
elected by NASDAQ OMX as the sole stockholder.
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\6\ Specifically, Article I of the By-Laws defines an Industry
Director as a person who: (i) Is or has served in the prior 3 years
as an officer, director, or employee of a broker or dealer,
excluding an outside director or a director not engaged in the day-
to-day management of a broker or dealer; (ii) is an officer,
director (excluding an outside director), or employee of an entity
that owns more than 10% of the equity of a broker or dealer, and the
broker or dealer accounts for more than 5% of the gross revenues
received by the consolidated entity; (iii) owns more than 5% of the
equity securities of any broker or dealer, whose investments in
brokers or dealers exceed 10% of his or her net worth, or whose
ownership interest otherwise permits him or her to be engaged in the
day-to-day management of a broker or dealer; (iv) provides
professional services to brokers or dealers, and such services
constitute 20% or more of the professional revenues received by the
Director or 20% or more of the gross revenues received by the
Director's firm or partnership; (v) provides professional services
to a director, officer, or employee of a broker, dealer, or
corporation that owns 50% or more of the voting stock of a broker or
dealer, and such services relate to the director's, officer's, or
employee's professional capacity and constitute 20% or more of the
professional revenues received by the Director or 20% or more of the
gross revenues received by the Director's firm or partnership; or
(vi) has a consulting or employment relationship with or provides
professional services to the Exchange or any affiliate thereof or to
FINRA or has had any such relationship or provided any such services
at any time within the prior 3 years.
\7\ Article I defines a Member Representative Director as a
Director who has been elected by the stockholders after having been
nominated by the Member Nominating Committee or voted upon by
Exchange Members pursuant to the By-Laws (or elected by the
stockholders without such nomination or voting in the case of the
initial Member Representative Directors elected pursuant to Section
4.3(b) of the By-Laws).
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Section 4.3 of the By-Laws provides that the number of Non-Industry
Directors, including at least three Public Directors and at least one
Director representative of issuers and investors,\8\ must equal or
exceed the sum of the number of Industry Directors and Member
Representative Directors. At least 20% of the Directors must be Member
Representative Directors. The By-Laws further stipulate that, as is
currently the case, one Industry Director must be selected as a
representative of a firm or organization that is registered with the
Exchange for the purposes of participating in options trading on
BOX.\9\ A Director may not be subject to a statutory
disqualification.\10\
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\8\ Section 6(b)(3) of the Act, 15 U.S.C. 78f(b)(3), requires
that one or more directors shall be representative of issuers and
investors and not be associated with a member of the Exchange,
broker, or dealer.
\9\ Section 6(b)(3) of the Act, 15 U.S.C. 78f(b)(3), requires
that the rules of the Exchange assure a fair representation of its
members in the selection of its directors and administration of its
affairs. The Member Representative Directors and the BOX Participant
Director satisfy this requirement because they are selected through
processes that rely on nominations made by nominating committees
composed of representatives of member firms, with an opportunity for
nomination of alternate candidates by members. See Section 4.4 of
the proposed By-Laws of the Exchange and Section 14 of the BOXR By-
Laws.
\10\ Section 3(a)(39) of the Act, 15 U.S.C. 78c(a)(39).
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The process for selecting Member Representative Directors is
described in Section 4.4 and Section 4.14. Section 4.14 provides that
the Board will appoint a Member Nominating Committee consisting of no
fewer than three and no more than six members. All members of the
Member Nominating Committee must be a current associated person of a
current Exchange Member. The Board will appoint such individuals after
appropriate consultation with representatives of Exchange Members. The
Member Nominating Committee will then nominate a slate of candidates
for Member Representative Director positions to be filled. Although the
Member Nominating Committee would have authority to nominate a number
of candidates in excess of the number of Board seats up for election,
the Member Nominating Committee would likely nominate a number of
candidates equal to the number of seats. The candidates nominated by
the Member Nominating Committee will be stated on a formal ``List of
Candidates.''
An Exchange Member may nominate an additional candidate for
inclusion on the List of Candidates by submitting a timely and duly
executed written petition to the Secretary of the Exchange. To be
timely, an Exchange Member's notice must be delivered to the Secretary
at the principal executive offices of the Exchange not later than the
close of business on the 90th day nor earlier than the close of
business on the 120th day prior to the first anniversary of the
preceding year's ``Voting Date'' \11\ (provided, however, that in the
event that the Voting Date is more than 30 days before or more than 70
days after such anniversary date, notice by the Exchange Member must be
so delivered not earlier than the close of business on the 120th day
prior to such Voting Date and not later than the close of business on
the later of the 90th day prior to such Voting Date or the 10th day
following the day on which public announcement of such Voting Date is
first made by the Exchange).\12\ The Exchange Member's notice must
include: (i) As to the person whom the Exchange Member proposes for
election as a Member Representative Director, all information relating
to that person that is required to be disclosed in solicitations of
proxies for election of Directors in an election contest, or is
otherwise required, in each case pursuant to Regulation 14A under the
Act and the rules thereunder (and such person's written consent to be
named in the List of Candidates and to serving as a Director if
elected); (ii) a petition in support of the candidate duly executed by
the authorized representatives of 10% or more of all Exchange Members;
and (iii) the name and address of the Exchange Member making the
proposal. The Exchange may require any proposed candidate to furnish
such other information as it may reasonably require to determine the
eligibility of such person to serve as a Member Representative
Director.
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\11\ The By-Laws define Voting Date as ``a date selected by the
Board for Exchange Members to vote with respect to Member
Representative Directors in the event of a Contested Vote.'' As
described below, the Board will select a Voting Date each year;
however, a vote would be conducted on the Voting Date only in the
event of a Contested Vote (i.e., if there is more than one candidate
for a Board seat).
In order to make the intent of this definition clearer,
immediately following the closing of the Merger, the Exchange will
propose to the newly constituted Board of the Exchange an amendment
to the definition to read as follows: `` `Voting Date' means the
date selected by the Board on an annual basis, on which Exchange
Members may vote with respect to Member Representative Directors in
the event of a Contested Vote.'' Following approval by the Board,
the Exchange will file the amendment as a proposed rule change for
approval by the Commission.
\12\ Because the voting procedures contemplated by the By-Laws
are new, the alternate time frames would apply in the case of the
first annual meeting held under the By-Laws. Therefore, a nomination
would be considered timely if delivered not earlier than the close
of business on the 120th day prior to the first Voting Date and not
later than the close of business on the later of the 90th day prior
to the first Voting Date, or the 10th day following the day on which
public announcement of such Voting Date is first made.
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After the Member Nominating Committee creates the List of
Candidates, the Board will determine a Voting Date and a ``Member
Voting Record Date.'' \13\ Promptly after selection of the Voting Date,
in a Notice to Exchange Members and in a prominent location on a
publicly accessible Web site, the Exchange will announce the Voting
Date and the List of Candidates, and describe the procedures for
Exchange Members to propose candidates for election at the
[[Page 26162]]
next annual meeting. If, by the date on which an Exchange Member may no
longer submit a timely nomination, there is only one candidate for each
Member Representative Director seat, the Member Representative
Directors would be elected by the stockholders directly from the List
of Candidates nominated by the Member Nominating Committee. If,
however, there is more than one candidate for a seat (i.e., if there is
a contested vote), a formal notice of the Voting Date and the List of
Candidates will be sent by the Exchange at least 10 days but no more
than 60 days prior to the Voting Date to the Exchange Members who were
Exchange Members on the Member Voting Record Date, by any means,
including electronic transmission, as determined by the Board or a
committee thereof.
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\13\ The By-Laws define ``Member Voting Record Date'' as a date
selected by the Board for the purpose of determining the Exchange
Members entitled to vote for Member Representative Directors on a
Voting Date in the event of a Contested Vote.
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In the event of a Contested Vote, each Exchange Member will have
the right to cast one vote for each Member Representative Director
position to be filled; \14\ provided, however, that any such vote must
be cast for a person on the List of Candidates. The votes may not be
cumulated. The votes shall be cast by written ballot, electronic
transmission or any other means as set forth in a notice to the
Exchange Members sent by the Exchange prior to the Voting Date. Only
votes received prior to 11:59 p.m. Eastern Time on the Voting Date
shall be counted. The persons on the List of Candidates who receive the
most votes shall be submitted to the stockholders for election, and the
stockholders shall elect that candidate.
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\14\ In order to limit the influence that a single affiliated
group of members might exercise over the Exchange, immediately
following the closing of the Merger, the Exchange will propose to
the newly constituted Board of the Exchange an amendment to
stipulate that no Member, either alone or together with its
affiliates, may account for more than 20% of the votes cast for a
candidate, and any votes cast by such Member, either alone or
together with its affiliates, in excess of such 20% limitation shall
be disregarded. Following approval by the Board, the Exchange will
file the amendment as a proposed rule change for approval by the
Commission.
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Notwithstanding the foregoing, the initial Board immediately
following the Merger and the adoption of these By-Laws will be selected
by NASDAQ OMX (as the sole stockholder) without use of the nomination
or election processes required for subsequent elections. Specifically,
the stockholders will hold a special meeting (or sign a consent in lieu
thereof) for the purpose of electing the Board, which shall include
individuals satisfying the classifications required by Section 4.3(a)
of the By-Laws but which shall not have been nominated or voted upon in
accordance with Section 4.4. The initial Member Representative
Directors will be officers, directors or employees of Exchange Members.
The initial Board will consist of at least three Public Directors, one
or two Staff Directors, at least two Member Representative Directors,
an Industry Director representing ``BOX Participants,'' \15\ at least
one Non-Industry Director representative of issuers and investors, and
such additional Industry and Non-Industry Directors as NASDAQ OMX as
the sole stockholder shall deem appropriate, consistent with the
compositional requirements of the By-Laws. As soon as practicable
thereafter, the Exchange shall hold its annual meeting for the purpose
of electing Directors in accordance with the normal processes
contemplated by the By-Laws.
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\15\ ``BOX Participant'' means a firm or organization that is
registered with the Exchange for the purposes of participating in
options trading in the BOX market.
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Section 4.5 of the By-Laws provides that Directors may be removed
from office by the stockholders, with the vacancy thus created also
filled by the stockholders, but that the stockholders may remove a
Member Representative Director only for cause, which shall include,
without limitation, the failure of such Director to be free of a
statutory disqualification. In addition, a Director is disqualified and
his or her term of office terminates immediately upon a determination
by the Board, by a majority vote of the remaining Directors: (a) that
the Director no longer satisfies the classification for which the
Director was elected; and (b) that the Director's continued service as
such would violate the compositional requirements of the Board set
forth in Section 4.3. Thus, for example, if a Public Director became
employed by a broker-dealer and the Board thereby had an inadequate
number of Public Directors, the Director would be disqualified and
removed. If a Director is disqualified and removed, and the remaining
term of office of such Director at the time of termination is not more
than 6 months, a replacement for the Director is not required until the
next annual meeting.
Section 4.7 of the By-Laws provides that if any Director position
other than a Member Representative Director position becomes vacant,
the Nominating Committee will nominate, and the Board will appoint by
majority vote, a person satisfying the classification (Industry, Non-
Industry, or Public Director) for the directorship to fill the vacancy.
Whenever a Member Representative Director position becomes vacant, the
Member Nomination Committee will nominate, and the Board will appoint
by majority vote, a person to fill the vacancy, except that if the
remaining term of office for the vacant Member Representative Director
position is less than 6 months, no replacement is required.
Sections 4.8, 4.9, and 4.10 contain standard provisions for a
Delaware corporation governing the quorum and voting requirements of
the Board, the appropriateness of reliance by Directors upon the
records, officers, and agents of the Exchange, and the rules governing
conduct of meetings of the Board. Section 4.9 also recognizes the
Exchange's status as a self-regulatory organization by providing that
the Board, when evaluating any proposal, shall, to the fullest extent
permitted by applicable law, take into account: (i) The potential
impact thereof on the integrity, continuity and stability of the
Exchange and the other operations of the Exchange, on the ability to
prevent fraudulent and manipulative acts and practices and on investors
and the public, and (ii) whether such would promote just and equitable
principles of trade, foster cooperation and coordination with persons
engaged in regulating, clearing, settling, processing information with
respect to and facilitating transactions in securities, or assist in
the removal of impediments to or perfection of the mechanisms for a
free and open market and a national market system.
Section 4.12 provides that the Board may delegate to one or more
committees that consist solely of one or more Directors the power and
authority to act on behalf of the Board in the management of the
business and affairs of the Exchange. However, no committee may have
the power or authority of the Board in reference to: (i) Approving or
adopting, or recommending to the stockholders, any action or matter
(other than the election of Directors) expressly required by Delaware
law to be submitted to stockholders for approval; or (ii) adopting,
amending, or repealing any By-Law of the Exchange. The section also
contains standard provisions for a Delaware corporation pertaining to
the conduct and populating of Board committees.
Section 4.13 establishes several standing Board committees and
delineates their general duties and compositional requirements:
The Executive Committee may exercise all the powers and
authority of the Board in the management of the business and affairs of
the Exchange between meetings of the Board (subject to the limits
described above). The number of Non-Industry Directors on
[[Page 26163]]
the Executive Committee must equal or exceed the number of Industry
Directors on the Executive Committee. The percentage of Public
Directors on the Executive Committee must be at least as great as the
percentage of Public Directors on the whole Board, and the percentage
of Member Representative Directors on the Executive Committee must be
at least as great as the percentage of Member Representative Directors
on the whole Board.
The Finance Committee shall advise the Board with respect
to the oversight of the financial operations and conditions of the
Exchange, including recommendations for the Exchange's annual operating
and capital budgets and proposed changes to the rates and fees charged
by the Exchange.
The Management Compensation Committee shall consider and
recommend compensation policies, programs, and practices for employees
of the Exchange. A majority of Management Compensation Committee
members shall be Non-Industry Directors. The Chief Executive Officer of
the Exchange shall be an ex-officio, non-voting member of the
Management Compensation Committee.
The Audit Committee shall consist of four or five
Directors, none of whom shall be officers or employees of the Exchange.
A majority of the Audit Committee members shall be Non-Industry
Directors. The Audit Committee shall include two Public Directors. A
Public Director shall serve as Chair of the Committee. The Audit
Committee shall: (A) Provide oversight over the Exchange's financial
reporting process and the financial information that is provided to the
stockholders and others; (B) provide oversight over the systems of
internal controls established by management and the Board and the
Exchange's legal and compliance process; (C) select, evaluate and,
where appropriate, replace the Exchange's independent auditors (or
nominate the independent auditors to be proposed for ratification by
the stockholders); and (D) direct and oversee all the activities of the
Exchange's internal audit function, including but not limited to
management's responsiveness to internal audit recommendations. The
Audit Committee shall have exclusive authority to: (A) Hire or
terminate the head of the Exchange's Internal Audit Department; (B)
determine the compensation of the head of the Internal Audit
Department; and (C) determine the budget for the Internal Audit
Department. The Internal Audit Department and its head shall report
directly to the Audit Committee. The Audit Committee may, in its
discretion, direct that the Internal Audit Department also report to
senior management of the Exchange on matters the Audit Committee deems
appropriate and may request that senior management of the Exchange
perform such operational oversight as necessary and proper, consistent
with preservation of the independence of the internal audit function.
The Internal Audit Department and its head may also be employees of one
or more affiliates of the Exchange (i.e., NASDAQ OMX), and may serve in
a similar capacity with respect to such affiliate(s).
The Regulatory Oversight Committee shall: (i) Oversee the
adequacy and effectiveness of the Exchange's regulatory and self-
regulatory organization responsibilities; (ii) assess the Exchange's
regulatory performance; and (iii) assist the Board and other committees
of the Board in reviewing the regulatory plan and the overall
effectiveness of the Exchange's regulatory functions. In furtherance of
its functions, the Regulatory Oversight Committee shall: (A) Review the
Exchange's regulatory budget and specifically inquire into the adequacy
of resources available in the budget for regulatory activities; (B)
meet regularly with the Exchange's Chief Regulatory Officer in
executive session; and (C) be informed about the compensation and
promotion or termination of the Chief Regulatory Officer and the
reasons therefore. The Regulatory Oversight Committee shall consist of
three members, each of whom shall be a Public Director and an
``independent director'' as defined in Rule 4200 of the Rules of the
Nasdaq Stock Market.
Section 4.14 and Articles VI and VII govern the appointment by the
Board of certain standing committees, not composed of Directors, to be
appointed to administer various provisions of the rules that the
Exchange expects to propose with respect to governance, listing, equity
trading, and member discipline:
The Member Nominating Committee will nominate candidates
for each Member Representative Director position on the Board, and will
also nominate candidates for appointment by the Board for positions on
certain standing committees with positions reserved for Member
Representatives. The Member Nominating Committee shall consist of no
fewer than three and no more than six members. All members of the
Member Nominating Committee shall be a current associated person of a
current Exchange Member. The Board will appoint such individuals after
appropriate consultation with representatives of Exchange Members.
The Nominating Committee will nominate candidates for all
other vacant or new Director positions on the Board, and candidates for
all other vacant or new positions on certain standing committees. In
nominating an Industry Director who is representative of BOX
Participants, the Nominating Committee shall adopt the recommendation
of the Nominating Committee of the Exchange's subsidiary, BOXR, and the
stockholders of the Exchange (i.e., NASDAQ OMX) shall elect the
candidate.\16\ The Nominating Committee shall consist of no fewer than
six and no more than nine members. The number of Non-Industry members
on the Nominating Committee must equal or exceed the number of Industry
members on the Nominating Committee. If the Nominating Committee
consists of six members, at least two shall be Public members. If the
Nominating Committee consists of seven or more members, at least three
shall be Public members. No officer or employee of the Exchange shall
serve as a member of the Nominating Committee in any voting or non-
voting capacity. No more than three of the Nominating Committee members
and no more than two of the Industry members shall be current
Directors. A Nominating Committee member may not simultaneously serve
on the Nominating Committee and the Board, unless such
[[Page 26164]]
member is in his or her final year of service on the Board, and
following that year, that member may not stand for election to the
Board until such time as he or she is no longer a member of the
Nominating Committee.
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\16\ As noted above in footnote 8, the BOX Participant Director,
together with the Member Representative Directors, allow the
Exchange to fulfill the requirement of Section 6(b)(3) of the Act,
15 U.S.C. 78f(b)(3) that the rules of the Exchange assure a fair
representation of its members in the selection of its directors and
administration of its affairs. Article II, Section 4 of the
Exchange's Constitution currently requires that the Exchange's Board
of Governors select and appoint as governor a candidate put forth by
the BOXR Nominating Committee for the position on the Board of
Governors reserved for a representative of BOX Participants. It is
the intent of the Exchange that a person nominated by the BOXR
Nominating Committee for this position will, consistent with the
current requirement in the Exchange's Constitution, continue to be
automatically nominated and elected through the Exchange's Board
selection process, unless such nominee is not eligible for service
under Section 4.3 of the By-Laws (i.e., because the nominee is
subject to a statutory disqualification). The Exchange believes that
this intent is reflected in the text of the Restated Certificate and
By-Laws as approved by the Exchange's members, but could be
reflected with greater clarity through further limited amendments to
the text of the By-Laws. Accordingly, immediately following the
closing of the Merger, the Exchange will propose to the newly
constituted Board of the Exchange an amendment to the By-Laws to
make it clear that the person nominated by the BOXR Nominating
Committee shall also be nominated by the Exchange Nominating
Committee and elected by the stockholders, unless such nominee is
not eligible for service under Section 4.3; and the Exchange shall
file the amendment as a proposed rule change for approval by the
Commission.
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The composition and duties of the Exchange Listing and
Hearings Review Council are described in Articles VI. Under the rules
to be proposed with respect to listings on the Exchange, the Exchange
Listing and Hearing Review Council will review appeals from decisions
to deny issuers listings on the Exchange, and will also consider and
make recommendations to the Board on policy and rule changes relating
to issuer listings. The Exchange Listing and Hearing Review Council
will consist of no fewer than eight and no more than eighteen members,
of which not more than 50% may be engaged in market-making activity or
employed by an Exchange Member whose revenues from market-making
activity exceed 10% of its total revenues. The Exchange Listing and
Hearing Review Council will include at least five Non-Industry members
(including at least two Public members), and a number of Member
Representative members that is equal to at least 20% of the total
number of members of the Exchange Listing and Hearing Review Council. A
quorum of the Exchange Listing and Hearing Review Council will consist
of a majority of its members, including one Non-Industry member and one
Member Representative member.
The composition and duties of the Exchange Review Council
are described in Article VII. Under the disciplinary and membership
rules to be proposed for the Exchange, the Exchange Review Council may
be authorized to act with respect to an appeal or review of a
disciplinary proceeding, a statutory disqualification proceeding, or a
membership proceeding; a review of an offer of settlement, a letter of
acceptance, waiver, and consent, and a minor rule violation plan
letter; the exercise of exemptive authority; and such other proceedings
or actions as may be authorized by the Exchange Rules.\17\ The Exchange
Review Council also may consider and make recommendations to the Board
on policy and rule changes relating to business and sales practices of
Exchange Members and associated persons and enforcement policies,
including policies with respect to fines and other sanctions. The
Exchange Review Council shall consist of no fewer than eight and no
more than twelve members. The Exchange Review Council shall include a
number of Member Representative members that is equal to at least 20%
of the total number of members of the Exchange Review Council. The
number of Non-Industry members, including at least three Public
members, shall equal or exceed the sum of the number of Industry
members and Member Representative members. A quorum of the Exchange
Review Council will consist of a majority of its members, including not
less than 50% of its Non-Industry members and one Member Representative
member.
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\17\ As provided in the current rules relating to BOX, certain
disciplinary matters pertaining to BOX Participants may be subject
to review by the BOXR Board of Directors and the Exchange Board. The
Exchange Review Council is not expected to have a role in BOX
matters.
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The Quality of Markets Committee will: (A) Provide advice
and guidance to the Board on issues relating to the fairness,
integrity, efficiency, and competitiveness of the information, order
handling, and execution mechanisms of the Exchange from the perspective
of investors, both individual and institutional, retail firms, market
making firms, companies listed on the Exchange, and other market
participants; and (B) advise the Board with respect to national market
system plans and linkages between the facilities of the Exchange and
other markets. The Quality of Markets Committee shall include broad
representation of participants in the Exchange, including investors,
market makers, integrated retail firms, and order entry firms. The
Quality of Markets Committee shall include a number of Member
Representatives that is equal to at least 20% of the total number of
members of the Quality of Markets Committee. The number of Non-Industry
members of the Quality of Markets Committee shall equal or exceed the
sum of the number of Industry members and Member Representative
members. A quorum of the Quality of Markets Committee will consist of a
majority of its members, and at least 50% of its Non-Industry members
must either be present or must waive attendance after receiving an
agenda of the meeting.
The Market Operations Review Committee will administer
certain rules planned for the Exchange, notably appeals from decisions
to cancel or modify clearly erroneous trades on the Exchange. The
Market Operation Review Committee must include a number of Member
Representatives that is equal to at least 20% of the total number of
members of the Market Operations Review Committee. No more than 50% of
the members of the Market Operations Review Committee shall be engaged
in market making activity or employed by an Exchange Member firm whose
revenues from market making activity exceed 10% of its total revenues.
The Arbitration and Mediation Committee will: (i) Advise
the Board on the development and maintenance of an equitable and
efficient system of dispute resolution that will equally serve the
needs of public investors and Exchange Members; (ii) shall monitor
rules and procedures governing the conduct of dispute resolution; and
(iii) shall have such other powers and authority as are necessary to
effectuate the purposes of the Exchange Rules. The Arbitration and
Mediation Committee must consist of no fewer than three and no more
than ten members, and shall have at least 50% Non-Industry members. As
is the case with the Nasdaq Exchange, the Arbitration Committee may be
populated with members of FINRA's Arbitration and Mediation Committee,
assuming the Exchange receives regulatory services from FINRA.\18\ A
quorum of the Arbitration and Mediation Committee will consist of a
majority of its members, and at least 50% of its Non-Industry members
must either be present or must waive attendance after receiving an
agenda of the meeting.
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\18\ ``The Board shall appoint an Arbitration and Mediation
Committee, or shall cause the Corporation to enter into an agreement
with a self-regulatory organization that provides regulatory
services pursuant to which such self-regulatory organization shall
appoint an Arbitration and Mediation Committee on the Corporation's
behalf.'' Section 4.14(e) of the Restated Certificate.
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The Market Regulation Committee will: (i) Advise the Board
on regulatory proposals and industry initiatives relating to
quotations, execution, trade reporting, and trading practices; (ii)
advise the Board in its administration of programs and systems for the
surveillance and enforcement of rules governing Exchange Member's
conduct and trading activities in the Exchange; (iii) provide a pool of
attorney panelists for hearing panels under the Exchange Rules; (iv)
participate in the training of hearing panelists on issues relating to
quotations, executions, trade reporting, and trading practices; and (v)
review and recommend to the Exchange Review Council changes to the
Exchange's guidelines for sanctions to be imposed on members for
violations of Exchange Rules. The Market Regulation Committee shall not
have any involvement in deciding whether or not to institute
disciplinary proceedings. The Market Regulation Committee shall have at
least 50% Non-Industry members. As is the case with the Nasdaq
Exchange, the Market Regulation Committee may be
[[Page 26165]]
populated with members of FINRA's Market Regulation Committee, assuming
the Exchange receives regulatory services from FINRA.\19\ A quorum of
the Market Regulation Committee will consist of a majority of its
members, and at least 50% of its Non-Industry members must either be
present or must waive attendance after receiving an agenda of the
meeting.
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\19\ The Board shall appoint a Market Regulation Committee, or
shall cause the Corporation to enter into an agreement with a self-
regulatory organization that provides regulatory services pursuant
to which such self-regulatory organization shall appoint a Market
Regulation Committee on the Corporation's behalf.
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Sections 4.15, 4.16, and 4.17 contain standard provisions for a
Delaware corporation requiring: (i) Recusal by Directors and committee
members subject to conflicts of interest; (ii) providing for the
enforceability of contracts in which a Director has an interest if
appropriately approved or ratified by disinterested Directors or by
stockholders, or if fair to the Exchange; (iii) allowing for
compensation of Board members; and (iv) allowing for Board action by
unanimous written consent.
Article V governs the appointment by the Board of the Exchange's
officers, agents, and employees, and specifically provides for the
appointment of a Chair of the Board,\20\ a Chief Executive Officer, a
President, Vice Presidents, a Chief Regulatory Officer, a Secretary, an
Assistant Secretary, a Treasurer, and an Assistant Treasurer.
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\20\ The designation by the By-Laws of the Chair of the Board as
an officer of the Corporation within the meaning of the By-Laws
reflects standard corporate practice for a Delaware corporation and
would not cause an independent Director chosen who is selected as
the Chair to cease to be an independent Director.
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The Chief Regulatory Officer shall have general supervision of the
regulatory operations of the Exchange, including responsibility for
overseeing the Exchange's surveillance, examination, and enforcement
functions and for administering any regulatory services agreements with
another self-regulatory organization to which the Exchange is a party.
The Chief Regulatory Officer shall meet with the Regulatory Oversight
Committee of the Exchange in executive session at regularly scheduled
meetings of such committee, and at any time upon request of the Chief
Regulatory Officer or any member of the Regulatory Oversight Committee.
The Chief Regulatory Officer may also serve as the General Counsel of
the Exchange.
Article VIII provides for indemnification by the Exchange of
Directors, officers, employees and agents in a manner consistent with
that of most Delaware stock corporations, and allows for the purchase
of director and officer liability insurance. Article IX contains
standard corporate provisions relating to the Exchange's capital stock,
including provisions relating to stock certificates, the Exchange's
stock ledger, and transfers of stock. However, like the Restated
Certificate, the By-Laws also contain a stipulation that all shares of
Common Stock are held by NASDAQ OMX, which may not transfer or assign
any shares of stock of the Exchange, in whole or in part, to any
entity, unless such transfer or assignment shall be filed with and
approved by the Commission under Section 19 of the Act and the rules
promulgated thereunder. The Article also contains a stipulation that
dividends may not be paid to the stockholders (i.e., to NASDAQ OMX)
using ``Regulatory Funds,'' which are defined as fees, fines, or
penalties derived from the regulatory operations of the Exchange. The
definition further provides, however, that the term shall not be
construed to include revenues derived from listing fees, market data
revenues, transaction revenues, or any other aspect of the commercial
operations of the Exchange, even if a portion of such revenues are used
to pay costs associated with the regulatory operations of the Exchange.
Article X contains miscellaneous standard corporate provisions
relating to the corporate seal, the fiscal year of the Exchange, waiver
of notice of meetings, and the Exchange's contracting authority.
Article XI authorizes amendments to the By-Laws by either the
stockholders or the vote of a majority of the whole Board,\21\ as well
as the adoption of emergency by-laws by the Board. Article XII contains
specific authorization for the Board to adopt rules needed to effect
the Exchange's obligations as a self-regulatory organization, to
establish disciplinary procedures and impose sanctions on members, to
establish standards for membership, and to impose dues, fees,
assessments, and other charges. Finally, Section 12.5 authorizes the
Board, or such person or persons as may be designated by the Board, in
the event of an emergency or extraordinary market conditions, to take
any action regarding: (a) The trading in or operation of the Exchange
or any other organized securities markets that may be operated by the
Exchange, the operation of any automated system owned or operated by
the Exchange, and the participation in any such system or any or all
persons or the trading therein of any or all securities; and (b) the
operation of any or all offices or systems of Exchange Members, if, in
the opinion of the Board or the person or persons hereby designated,
such action is necessary or appropriate for the protection of investors
or the public interest or for the orderly operation of the marketplace
or the system.
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\21\ All such changes must be filed with the Commission under
Section 19(b) of the Act, 15 U.S.C. 78s(b), and become effective
thereunder before being implemented.
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BOXR LLC Agreement
Upon the creation of BOXR, the Exchange filed a Certificate of
Formation with the State of Delaware.\22\ The purpose of the creation
of BOXR was specifically for supporting the operation, regulation, and
surveillance of the BOX facility. In connection with that, the Exchange
drafted and filed with the Commission the BOXR By-Laws, which filing
was approved on January 13, 2004,\23\ and incorporated into the BOX
Rules. However, no written LLC operating agreement was created for the
entity. Accordingly, since the time of formation, BOXR has operated
under an unwritten operating agreement, with its written By-Laws
standing in place for, and reflecting, the intention of the agreement
of BOXR. The Exchange therefore proposes to adopt the BOXR LLC
Agreement, which includes all standard provisions typically found in a
State of Delaware Limited Liability Company operating agreement. These
provisions include a statement, found in Section 22 of the agreement,
that the BOXR LLC Agreement may not be deemed to provide rights to any
persons other than those named specifically in the agreement. The
provision stipulates, however, that such rights include the rights of
BOX Participants in the selection of directors of BOXR in the manner
currently provided by the BOXR By-Laws. In addition, Section 20 of the
BOXR LLC Agreement will provide that a transfer or assignment of the
Exchange's limited liability company interests in BOXR must be filed
with and approved by the Commission under Section 19 of the Act. The
BOXR LLC Agreement also expands the recognized officers of BOXR to
include its Chief Legal Officer and includes Schedules that list the
directors and officers of BOXR as of April 15, 2008.
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\22\ The Certificate of Formation was filed on March 25, 2002.
\23\ See Securities Exchange Act Release No. 49065 (January 13,
2004), 69 FR 2768 (January 20, 2004) (SR-BSE-2003-04).
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BOXR By-Laws
The BOXR By-Laws are being amended for consistency with other
[[Page 26166]]
changes being made in the governance of the Exchange. Specifically, the
proposed changes: (i) Replace references to the Constitution of the
Exchange with references to the By-Laws and references to the Board of
Governors with references to the Board of Directors; (ii) add
appropriate references to the BOXR LLC Agreement; (iii) amend the
definition of ``Public Director'' to exclude persons having a material
business relationship with affiliates of the Exchange, BOX, or BOXR;
and (iv) make several clarifying and corrective edits. In addition,
Section 14 is being amended to state that the BOX Participant nominee
selected by BOX Participants for service on the Exchange Board is
recommended for service on such Board, but is not directly elected, to
reflect the fact that BOX Participants are not stockholders of the
Exchange. Section 14 is also amended to provide that a disciplinary
decision of a BOXR Hearing Committee or panel with respect to any BOX
Participant that is an affiliate of NASDAQ OMX within the meaning of
proposed Chapter XXXIX, Section 2 of the rules of the Exchange (as
described below) may not be appealed to or reviewed by the BOXR Board
of Directors or the Exchange Board of Directors, but rather shall
constitute final disciplinary action of the Exchange for purposes of
Commission Rule 19d-1(c)(1) and may be appealed to the Commission.
Together with the new rules described below, the limitation is intended
to guard against any possibility that the Exchange may exercise, or
forebear to exercise, regulatory authority with respect to an
affiliated member in a manner that is influenced by commercial
considerations.\24\ Finally, the Exchange is proposing to replace the
indemnification provisions of Section 24 with a cross-reference to
updated indemnification provisions being adopted in the BOXR LLC
Agreement.
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\24\ Prior to resuming trading of equities securities, the
Exchange will propose new rules that will include a comparable
restriction on review of disciplinary decisions affecting an
affiliated member trading equities through the Exchange.
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Change of Control of BSX
BSX was formed in 2004 as a joint venture between the Exchange and
several investors to operate an electronic trading facility (``Boston
Equities Exchange'' or ``BeX'') for trading cash equities. BeX ended
its operations in September 2007. In connection with the Merger, NASDAQ
OMX is purchasing all of the outstanding limited liability company
interests in BSX held by investors other than the Exchange. By virtue
of this purchase, NASDAQ OMX will directly own 46.79% of these
interests, and will indirectly, through the Exchange, own the remainder
of the outstanding interests in BSX. Section 8.1 of the BSX Operating
Agreement provides that the Exchange must obtain Commission approval
for certain transfers of ownership interests in BSX. Accordingly, the
Exchange, through this filing, seeks Commission approval for the
transfer of ownership interests to NASDAQ OMX contemplated by the
Merger. Following such transfer, the Exchange and NASDAQ OMX will be
the sole members of BSX, and the admission of additional or substitute
members would require approval by the Commission pursuant to a filing
under Section 19 of the Act. In addition, the Exchange is also
proposing amendments to the BSX Operating Agreement to reflect its
status as a wholly owned subsidiary of NASDAQ OMX, and to remove
references to BeX. Notably, the Exchange is proposing to make the
following amendments:
Section 4.1 is amended to provide that a five-member Board
of Directors will be selected by BSE.
Section 4.4 is amended to replace a provision requiring a
super-majority of director votes in favor of BSX taking certain
significant actions, such as entry into a new line of business or
replacing BSE as BSX's regulatory service provider, with more general
authority of BSE to veto or mandate actions as dictated by regulatory
requirements.
Article VII and Sections 8.2 and 8.3 are amended to remove
provisions that allow members to exercise rights of first refusal in
the event that one member proposes to transfer its ownership interests
in BSX to another member or BSX proposes to issue additional units of
ownership.
Section 8.4(f) (redesignated as 8.2(f)) is amended to
clarify terms used to describe certain ownership interests in a Member
of BSX.
Various amendments are being made to delete references to
BeX.
Sections 8.5 and 8.6 (redesignated as Sections 8.3 and
8.4), which restricted ownership and voting of ownership interests in
BSX above the 20% level by a BeX participant or its affiliates, are
being retained but amended. The amendments replace ``BeX Participant''
with ``BSE member'' to apply more broadly to any person that is a
member of the Exchange. However, the amendments also provide that the
restrictions of these provisions shall not be construed to limit the
ownership of membership interests by NASDAQ OMX or BSE. This proviso is
necessary because, as discussed in greater detail below, the Nasdaq
Exchange owns two broker-dealers, the ownership of which has been
previously approved by the Commission. These broker-dealers are, and
will continue to be, members of the Exchange.
Article 9, which governs distributions to Members, is
being amended to adopt a restriction on distributions of Regulatory
Funds comparable to the restriction proposed for inclusion in the
Exchange's By-Laws.
Article 13, which governs disputes among members via
arbitration, is being deleted to reflect the BSX's wholly owned status.
Section 16.2, which governs the confidentiality
obligations of Members, is being amended: (i) To clarify that Members
may use confidential information pursuant to the Act and the rules and
regulations thereunder; (ii) to stipulate that directors, officers, and
employees receiving confidential information must themselves be under
confidentiality obligations; and (iii) to require Members to conduct
their business activities so as to limit the applicability of legal
disclosure obligations that may supersede the confidentiality
requirements of the BSX Operating Agreement.
New Section 16.7 is being added to provide that to the
fullest extent permitted by applicable law, all confidential
information pertaining to the self-regulatory function of the Exchange
or the Exchange's equity business (including but not limited to
disciplinary matters, trading data, trading practices and audit
information) contained in the books and records of BSX shall: (a) Not
be made available to any person (other than as provided in the proviso
of this sentence) other than to those officers, directors, employees
and agents of BSX who have a reasonable need to know the contents
thereof; (b) be retained in confidence by BSX and its officers,
directors, employees and agents; and (c) not be used for any commercial
purposes; provided, that nothing in this sentence shall be interpreted
so as to limit or impede the rights of the Commission or the Exchange
to access and examine such confidential information pursuant to the
federal securities laws and the rules and regulations thereunder, or to
limit or impede the ability of any officers, directors, employees or
agents of BSX to disclose such confidential information to the
Commission or the Exchange.
Amending Section 18.6 to clarify that the jurisdiction of
the U.S. federal courts, the Commission, and the
[[Page 26167]]
Exchange over BSX, its Members, and the officers, directors, agents,
and employees of the Company and its Members is exclusive (subject,
however, to Delaware jurisdiction over matters relating to the
organization or internal affairs of BSX), adding conforming references
with respect to the provision's waiver of claims as to lack of personal
jurisdiction, and providing for the waiver of any foreign secrecy or
blocking statutes or regulations to the fullest extent permitted by
law.
Prior to resuming trading of cash equities, the Exchange will file
amended rules with the Commission that would replace the current BeX
rules, as well as certain other rules of the Exchange. At this time,
the Exchange expects to operate its cash equities market through the
BSX entity. However, the Exchange will not resume cash equities trading
until the new rule set is approved. If necessary to accurately reflect
BSX's operations and to impose any additional regulatory safeguards
deemed necessary by the Exchange or the Commission, the new rule set
will include further amendments to the BSX Operating Agreement. In
addition, the Exchange will provide the Commission with the opportunity
to review, and if necessary, approve, any agreements between BSX and
the Exchange or any third party to support BSX's operations of a
facility of the Exchange, such as an amended BSE Facility Services
Agreement. References to superseded agreements that formerly supported
BeX, such as agreements with Lava Trading, Inc., and Atos Euronext
S.A., are being deleted from the BSX Operating Agreement, as are other
provisions that were applicable to BSX's initial formation and
operation.
New Rules
The Exchange proposes to adopt two new rules that will reflect its
status as a wholly owned subsidiary of NASDAQ OMX upon the
effectiveness of the Merger. The purpose of the rules is to guard
against any possibility that the Exchange may exercise, or forebear to
exercise, regulatory authority with respect to an affiliated member in
a manner that is influenced by commercial considerations, to provide an
opportunity for Commission review of certain proposed affiliations, and
to ensure that certain affiliated members do not receive advantaged
access to information in comparison with unaffiliated members. The
Exchange believes that the proposed rules will provide added assurance
of regulatory integrity without subjecting the Exchange and its
affiliates to unwarranted restrictions on their commercial activities.
First, Chapter XXXIX, Section 1 will limit ownership of NASDAQ
OMX's voting securities by members of the Exchange and their associated
persons (i.e., their registered representatives). The rule is
comparable to Rule 2130 of the Nasdaq Exchange, and provides that no
member or associated person of a member shall be the beneficial owner
of greater than 20% of the then-outstanding voting securities of NASDAQ
OMX. ``Beneficial ownership'' is defined with reference to NASDAQ OMX's
Certificate of Incorporation, which in turn provides that a person
shall be deemed the ``beneficial owner'' of, shall be deemed to have
``beneficial ownership'' of, and shall be deemed to ``beneficially
own'' any securities: (i) Which such person or any of such person's
affiliates is deemed to beneficially own, directly or indirectly,
within the meaning of Rule 13d-3 under the Act * * *; \25\ (ii) subject
to certain narrow exceptions described in the certificate of
incorporation, which such person or any of such person's affiliates has
the right to acquire or to vote pursuant to any agreement, arrangement,
or understanding; or (iii) subject to certain narrow exceptions
described in the certificate of incorporation, which are beneficially
owned, directly or indirectly, by any other person and with respect to
which such person or any of such person's affiliates has any agreement,
arrangement or understanding for the purpose of acquiring, holding,
voting or disposing of such securities.
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\25\ Rule 13d-3 under the Act, 17 CFR 240.13d-3, in turn
provides that a beneficial owner of a security includes any person
who, directly or indirectly, through any contract, arrangement,
understanding, relationship, or otherwise has or shares voting power
or investment power.
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Second, Chapter XXXIX, Section 2 regulates affiliation between the
Exchange and its affiliates, on the one hand, and Exchange members, on
the other hand, in a manner comparable to Rule 2140 of the Nasdaq
Exchange. In general, the proposed rule provides that the Exchange must
file a proposed rule change with the Commission before the Exchange or
an entity with which it is affiliated acquires or maintains an
ownership interest in, or engages in a business venture with, an
Exchange member or an affiliate of an Exchange member.\26\ The rule
defines ``affiliate'' with reference to Rule 12b-2 under the Act,\27\
which provides that if one person controls, is controlled by, or is
under common control another person, the persons are affiliates.
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\26\ As used in the rule, the term ``affiliate'' includes
natural persons, but the term ``entity,'' when used to describe an
affiliate, excludes natural persons.
\27\ 17 CFR 240.12b-2.
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The proposed rule would make it clear that in a case where the
Exchange or an affiliate of the Exchange proposes an acquisition of, or
a merger or business venture with an Exchange member, a Commission
filing will be required. In order to make it clear that the obligation
to avoid affiliations that have not been filed is imposed by the rule
both on the Exchange and its members, moreover, the rule provides that
an Exchange member shall not be or become an affiliate of the Exchange,
or an affiliate of any entity affiliated with the Exchange, without a
Commission filing.
The term ``business venture,'' as used in the rule, is defined as
an arrangement under which the Exchange or an entity with which it is
affiliated, on the one hand, and an Exchange member or affiliate
thereof, on the other hand, engage in joint activities with an
expectation of shared profit and a risk of shared loss from common
entrepreneurial efforts. Thus, the term does not include, and the
proposed rule does not regulate, contracts with members or their
affiliates to provide goods, products, or services for consideration,
including, but not limited to, asset or stock purchase agreements that
do not result in ongoing ties with a member or its affiliates,\28\
credit or debt facilities, licenses of intellectual property, contracts
for investment banking, financial advisory, or consulting services,\29\
or the provision of transaction services or data to a broker-dealer
member or products or services to a listed company that is or that owns
a member broker-dealer.
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\28\ For example, in the case of an acquisition of a non-member
subsidiary of a member in a transaction that did not result in an
ongoing affiliation with the member, the transaction would not be
regulated by the rule.
\29\ In some cases, such contracts may involve sharing of
confidential information with a member in circumstances where a
member acts as a fiduciary for BSE or one of its affiliates. The
member would be required to take measures to prevent such
information from being misused, and a failure to do so would
constitute a violation of BSE rules, including, depending on the
circumstances, Chapter II, Sections 14, 25, and 36, and Chapter
XXXVII, Section 11. Amended rules to be proposed by BSE to govern
equity trading in the future will maintain comparable prohibitions.
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The rule limits possible expansive interpretations of the term
``affiliate'' by stipulating that one entity is not deemed to be an
affiliate of another entity solely by virtue of having a common
director. For example, if one of the member representative directors of
the Exchange is also a director of an Exchange member, that member
would not be deemed to be an affiliate of the
[[Page 26168]]
Exchange solely because of the common director. In addition, the rule
should not be construed to regulate in any manner the selection of
directors or standing committee members of the Exchange, NASDAQ OMX,
the Nasdaq Exchange, or their affiliates, provided such selections are
conducted in accordance with applicable provisions of governing
corporate documents.
In circumstances where a Commission filing is required, the rule
may, in appropriate cases, permit a filing to be submitted on an
immediately effective basis under Section 19(b)(3)(A) of the Act \30\
and Rule 19b-4(f) thereunder.\31\ For example, in cases where a
proposed affiliation or business venture would not result in the
establishment of a ``facility'' of the Exchange within the meaning of
Section 3 of the Act,\32\ a filing to establish rules to govern the
operation of the affiliate or business venture would not be required or
appropriate. Rather, in such circumstances, the Exchange would expect
to engage in informal consultation with the Division of Trading and
Markets and/or members of the Commission, and would then submit a
filing to amend the rule itself, to establish that the affiliation or
business venture could exist as an exception to the rule. Depending on
the circumstances, such a filing might be submitted on an immediately
effective basis.
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\30\ 15 U.S.C. 78s(b)(3)(A).
\31\ 17 CFR 240.19b-4(f).
\32\ 15 U.S.C. 78c.
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There are also several important exceptions to the general filing
requirement of the rule. First, the rule would not require a filing for
transactions that result in an Exchange member acquiring or holding an
interest in NASDAQ OMX that is consistent with Chapter XXXIX, Section 1
(discussed above). Second, no filing is required for the Exchange or an
entity affiliated with the Exchange acquiring or maintaining an
ownership interest in, or engaging in a business venture with, an
affiliate of an Exchange member if there are information barriers
between the member and the Exchange and its facilities, such that the
member: (i) Will not be provided an informational advantage concerning
the operation of the Exchange and its facilities, and will not be
provided changes or improvements to the trading system that are not
available to the industry generally or other Exchange members; (ii)
will not have knowledge in advance of other members of proposed
changes, modifications, or improvements to the operations or trading
systems of the Exchange and its facilities, including advance knowledge
of Exchange filings pursuant to Section 19(b) of the Act; (iii) will be
notified of any proposed changes, modifications, or improvements to the
operations or trading systems of the Exchange and its facilities in the
same manner as other Exchange members are notified; and (iv) will not
share employees, office space, or databases with the Exchange or its
facilities, NASDAQ OMX, or any entity that is controlled by NASDAQ
OMX.\33\ The Exchange's Regulatory Oversight Committee must certify, on
an annual basis, to the Director of the Division of Trading and
Markets, that the Exchange has taken all reasonable steps to implement
the foregoing requirements with respect to any affiliate to which they
apply and is in compliance therewith.
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\33\ BSE will not construe these limitations to bar an employee
of an affiliated member from serving on a BSE advisory committee,
since: (i) Such committee members will be required to sign
confidentiality agreements with regard to information received
through committee service, and (ii) the committee member employed by
the affiliate would receive information provided through committee
service at the same time as other committee members.
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This exception is aimed at circumstances in which the Exchange or
an affiliated entity acquires, or enters into a business venture with,
an affiliate of an Exchange member, and the Exchange erects information
barriers between the member and the Exchange and its facilities. Thus,
the Exchange ensures that the member does not receive any advantage as
a result of its affiliation.
In connection with the adoption of this rule, it is also necessary
for the Exchange to seek Commission approval under the rule for the
affiliation that will result by virtue of the Merger between the
Exchange and the two broker-dealer subsidiaries of the Nasdaq Exchange:
Nasdaq Execution Services, LLC (``NES'') and NASDAQ Options Services,
LLC (``NOS''). The acquisition of the entities that are now NES and NOS
by The Nasdaq Stock Market, Inc. (now NASDAQ OMX) was approved by the
Commission in 2004 and 2005.\34\ The rules under which NES currently
routes orders to other market centers were approved by the Commission
in 2006 and subsequently amended on several occasions.\35\ Notably,
Nasdaq Exchange Rule 4758(b) establishes the parameters for operation
of NES as follows: (1) All routing of equities by the Nasdaq Exchange
is performed by NES, which, in turn, routes orders to other market
centers as directed by the Nasdaq Exchange; (2) NES will not engage in
any business other than: (a) As a outbound router for the Nasdaq
Exchange and (b) any other activities it may engage in as approved by
the Commission; (3) NES will operate as a facility, as defined in
Section 3(a)(2) of the Act, of the Nasdaq Exchange; (4) for purposes of
Commission Rule 17d-1, the designated examining authority of NES will
be a self-regulatory organization unaffiliated with the Nasdaq Exchange
or any of its affiliates; (5) the Nasdaq Exchange shall be responsible
for filing with the Commission rule changes related to the operation
of, and fees for services provided by, NES, and NES shall be subject to
exchange non-discrimination requirements; (6) the books, records,
premises, officers, agents, directors and employees of NES, as a
facility of the Nasdaq Exchange, shall be deemed to be the books,
records, premises, officers, agents, directors and employees of the
Nasdaq Exchange for purposes of, and subject to oversight pursuant to,
the Act, and the books and records of NES, as a facility of the Nasdaq
Exchange, shall be subject at all times to inspection and copying by
the Commission; and (7) use of NES is optional.
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\34\ See Order Granting Application for a Temporary Conditional
Exemption Pursuant To Section 36(a) of the Exchange Act by the
National Association of Securities Dealers, Inc. Relating to the
Acquisition of an ECN by The Nasdaq Stock Market, Inc., Securities
Exchange Act Release No. 50311 (September 3, 2004), 69 FR 54818
(September 10, 2004); Order Approving a Proposed Rule Change To
Establish Rules Governing the Operation of the INET System,
Securities Exchange Act Release No. 52902 (December 7, 2005), 70 FR
73810 (December 13, 2005) (SR-NASD-2005-128).
\35\ See Securities Exchange Act Release No. 56867 (November 29,
2007), 72 FR 69263 (December 7, 2007) (SR-NASDAQ-2007-065);
Securities Exchange Act Release No. 56708 (October 26, 2007), 72 FR
61925 (November 1, 2007) (SR-NASDAQ-2007-078); Securities Exchange
Act Release No. 55335 (February 23, 2007), 72 FR 9369 (March 1,
2007) (SR-NASDAQ-2007-005); Securities Exchange Act Release No.
54613 (October 17, 2006), 71 FR 62325 (October 24, 2006) (SR-NASDAQ-
2006-043); Securities Exchange Act Release No. 54271 (August 3,
2006), 71 FR 45876 (August 10, 2006) (SR-NASDAQ-2006-027); and
Securities Exchange Act Release No. 54155 (July 14, 2006), 71 FR
41291 (July 20, 2006) (SR-NASDAQ-2006-001).
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Currently, routing by NES on behalf of the Nasdaq Exchange takes
two forms: (i) Orders that access any liquidity on the Nasdaq Exchange
book that has a price equal to or superior to the prices available on
other ``automated market centers'' and thereafter route to seek the
best available price, and (ii) routing of ``directed orders'' to
automated market centers other than the Nasdaq Exchange on an
``immediate-or-cancel'' basis. Such directed orders may be designated
as ``intermarket sweep orders,'' which may be executed by the receiving
venue based on the representation of the market participant that it has
routed to
[[Page 26169]]
all superior protected quotations, or not so designated, in which case
the orders will execute only if their execution would not result in a
trade-through.
NOS serves as the outbound router for the Nasdaq Options Market
(``NOM''), which commenced operations on March 31, 2008. Under NOM Rule
Chapter VI, Section 11: (1) NOM will route orders in options via NOS,
which serves as the sole ``Routing Facility'' of NOM; (2) the sole
function of the Routing Facility will be to route orders in options
listed and open for trading on NOM to away markets pursuant to NOM
rules, solely on behalf of NOM; (3) NOS is a member of an unaffiliated
self-regulatory organization which is the designated examining
authority for the broker-dealer; (4) the Routing Facility is subject to
regulation as a facility of the Nasdaq Exchange, including the
requirement to file proposed rule changes under Section 19 of the Act;
(5) NOM shall establish and maintain procedures and internal controls
reasonably designed to adequately restrict the flow of confidential and
proprietary information between the Nasdaq Exchange and its facilities
(including the Routing Facility), and any other entity; and (6) the
books, records, premises, officers, directors, agents, and employees of
the Routing Facility, as a facility of the Nasdaq Exchange, shall be
deemed to be the books, records, premises, officers, directors, agents,
and employees of the Nasdaq Exchange for purposes of and subject to
oversight pursuant to the Act, and the books and records of the Routing
Facility, as a facility of the Exchange, shall be subject at all times
to inspection and copying by the Nasdaq Exchange and the
Commission.\36\
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\36\ See Securities Exchange Act Release No. 57478 (March 12,
2008), 73 FR 14521 (March 18, 2008) (SR-NASDAQ-2007-004 and -080)
(``NOM Approval Order'').
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Unlike NES, NOS does not have a ``directed order'' for options that
are trading on NOM; rather, all routable orders for options that are
trading on NOM check the NOM book prior to routing. However, NOS also
routes orders in options that are not trading on NOM. When routing
orders in options that are not listed and open for trading on NOM, NOS
will not be regulated as a facility of the Nasdaq Exchange but rather
as a broker-dealer regulated by its designated examining authority.
However, as provided by Chapter IV, Section 5 of the NOM Rules, all
orders routed by NOS under these circumstances will be routed to away
markets that are at the best price, and solely on an immediate-or-
cancel basis.
Although not explicitly stated in Chapter VI, Section 11, NOS, like
NES, will be subject to exchange non-discrimination requirements, and
the use of NOS will be optional.\37\ In addition, NOS will not engage
in any business other than the activities approved by the Commission in
the NOM Approval Order and such other activities as may be approved by
the Commission at a later date.
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\37\ Consistent with this restriction, Chapter VI, Section 11
currently states that NOM participants can designate orders as
either available for routing or not available for routing.
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In order to further restrict the interaction between the Exchange
and NES and NOS, the Nasdaq Exchange has agreed that it will, prior to
the closing of the Merger, amend its rules to change the routing
practices of NES and NOS. With respect to NES, directed orders will not
be eligible for routing to Exchange facilities (including a planned
Exchange facility for trading equities). With respect to NOS, when
routing orders in options that are not listed and open for trading on
NOM, NOS will not route to Exchange facilities (including BOX). Routing
of orders that check the Nasdaq Exchange and NOM books prior to routing
to the Exchange will continue.
The Exchange notes that at a later date, an equity trading system
operated by the Exchange may opt to use NES to route on behalf of the
Exchange. Similarly, if the Exchange operates an options trading system
other than BOX following a future termination of relations between the
Exchange and BOX, the Exchange may opt to use NOS to perform
routing.\38\ Such future uses of NES or NOS would be reflected in
filings to establish the terms and conditions of such routing, but
would not allow for routing of directed orders to the Nasdaq Exchange,
NOM, or any other affiliated exchange or trading facility thereof.
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\38\ In this regard, it should be noted that both the New York
Stock Exchange LLC and NYSE Arca, Inc. (``NYSE Arca'') use NYSE
Arca's broker-dealer subsidiary to perform routing.
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In light of the foregoing facts and circumstances, and in
accordance with proposed Exchange Rule Chapter XXXIX, Section 2(a)(2),
the Exchange proposes that NES and NOS be permitted to become
affiliates of the Exchange subject to the following:
With respect to NES: NES remains a facility of the Nasdaq
Exchange; use of NES's routing function by Nasdaq Exchange members
continues to be optional; and NES does not provide routing of directed
orders to the Exchange or any trading facilities thereof, unless such
orders first attempt to access any liquidity on the Nasdaq Exchange
book.
With respect to NOS: NOS remains a facility of the Nasdaq
Exchange; use of NOS's Routing Facility function by Nasdaq Exchange
members continues to be optional; and NOS does not provide routing of
orders in options that are not listed and open for trading on NOM to
the Exchange or any trading facilities thereof.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with the provisions of Section 6 of the Act,\39\ in general, and with
Sections 6(b)(1), (b)(3) and (b)(5) of the Act,\40\ in particular, in
that the proposal: enables the Exchange to be so organized as to have
the capacity to be able to carry out the purposes of the Act and to
comply with and enforce compliance by Exchange Members and persons
associated with Exchange Members with provisions of the Act, the rules
and regulations thereunder, and the rules of the Exchange; is designed
to assure a fair representation of Exchange Members in the selection of
Directors; and is designed to prevent fraudulent and manipulative acts
and practices, to promote just and equitable principles of trade, to
foster cooperation and coordination with persons engaged in regulating,
clearing, settling, processing information with respect to, and
facilitating transactions in securities, to remove impediments to and
perfect the mechanism of a free and open market and a national market
system, and, in general, to protect investors and the public interest.
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\39\ 15 U.S.C. 78f.
\40\ 15 U.S.C. 78f(b)(1), (3) and (5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
result in any burden on competition that is not necessary or
appropriate in furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to
[[Page 26170]]
90 days of such date if it finds such longer period to be appropriate
and publishes its reasons for so finding or (ii) as to which the self-
regulatory organization consents, the Commission will:
(A) By order approve such proposed rule change, or
(B) Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an e-mail to [email protected]. Please include
File Number SR-BSE-2008-23 on the subject line.
Paper Comments
Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, Station Place, 100 F
Street, NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-BSE-2008-23. This file
number should be included on the subject line if e-mail is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for inspection and
copying in the Commission's Public Reference Room, 100 F Street, NE.,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. Copies of the filing also will be available for
inspection and copying at the principal office of the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-BSE-2008-23 and should be
submitted on or before May 29, 2008.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\41\
Florence E. Harmon,
Deputy Secretary.
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\41\ 17 CFR 200.30-3(a)(12).
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[FR Doc. E8-10093 Filed 5-7-08; 8:45 am]
BILLING CODE 8010-01-P