[Federal Register Volume 66, Number 239 (Wednesday, December 12, 2001)]
[Notices]
[Pages 64327-64328]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-30650]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45135; File No. SR-NASD-2001-34]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change by the National Association of Securities Dealers, Inc. Relating 
to Amendments to the Restated Certificate of Incorporation of The 
Nasdaq Stock Market, Inc.

December 5, 2001.

I. Introduction

    On May 8, 2000, the National Association of Securities Dealers, 
Inc. (``NASD'' or ``Association''), through its subsidiary, the Nasdaq 
Stock Market, Inc. (``Nasdaq''), filed with the Securities and Exchange 
Commission (``SEC'' or ``Commission''), pursuant to section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act'') \1\ and rule 19b-4 
thereunder,\2\ a proposed rule change to amend its Restated Certificate 
of Incorporation (``Certificate'') to afford the holders of 4.0% 
Convertible Subordinated Notes due 2006 (the ``Notes'') the right to 
vote with Nasdaq stockholders.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    On June 4, 2001 the NASD filed Amendment No. 1 to the proposal.\3\ 
The proposed rule change, as amended, was published for comment in the 
Federal Register on June 22, 2001.\4\ No comments were received on the 
proposal. This order approves the proposal.
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    \3\ See letter from Mary M. Dunbar, Vice President, Nasdaq, to 
Katherine England, Assistant Director, Division of Market 
Regulation, Commission, dated June 12, 2001 (``Amendment No. 1'').
    \4\ Securities Exchange Act Release No. 44423 (June 13, 2001), 
66 FR 33593.
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II. Description of the Proposal

    The proposed rule change amends the Certificate to afford the 
holders of 4.0% Convertible Subordinated Notes due 2006 (the ``Notes'') 
the right to vote with Nasdaq stockholders. Nasdaq has sold $240 
million of the Notes to Hellman & Friedman Capital Partners IV, L.P. 
H&F International Partners IV-A, L.P., H&F International Partners IV-B, 
L.P., and H&F Executive Fund IV, L.P. (collectively, the ``HFCP IV 
LPs''). Below is a description of the amendments proposed to the 
Certificate to ensure that holders of the Notes have the right to vote 
with Nasdaq shareholder.

Article Fourth

    Paragraph C.1. Nasdaq proposes to amend this paragraph of the 
Certificate to provide that holders of the Notes have the right to vote 
with Nasdaq stockholders, with each holder of Notes entitled to a 
number of votes equal to the number of shares of common stock such 
holder would obtain upon conversion of the principal amount of Notes 
held by such person. The amendment also provides that holders of Notes 
shall be deemed to be stockholders and the Notes shall be deemed to be 
shares of stock solely for the purposes of provisions of the Delaware 
General Corporation Law and the Certificate that require the vote of 
stockholders as a prerequisite to corporate action.
    Paragraph C.2. Nasdaq proposes to amend the provision of the 
Certificate that imposes restrictions on stockholders voting shares in 
excess of 5% of outstanding stock to make the same restriction 
applicable to holders of the Notes. Therefore, any person who 
beneficially owns shares of common stock and/or Notes convertible into 
common stock in excess of 5% of the then-outstanding shares of common 
stock would not be permitted to vote such excess shares and/or 
Notes.\5\ As is true under the current Certificate, the calculation of 
the number of shares of common stock outstanding at any particular time 
is to be made in accordance with the last sentence of SEC Rule 13d-
3(d)(1)(i).\6\ As a result, shares of common stock that may be acquired 
by a holder of Notes through conversion would be deemed to be 
outstanding for purposes of calculating the voting power owned by such 
holder.
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    \5\ The Commission notes that because paragraph C.1(b) of the 
Certificate deems the holders of Notes to be shareholders, this 
provision restricts voting of Notes to the extent that they are 
convertible into shares that exceed 5% of Nasdaq's then-outstanding 
Common Stock, or that exceed 5% when aggregated with the 
noteholder's direct holdings of Common Stock. Shares underlying the 
Notes held by a noteholder shall be deemed to be outstanding for the 
purpose of computing the percentage owned by that noteholder. The 
voting restriction applies only to holdings of shares and/or Notes 
in excess of the 5% threshold, however.
    \6\ 17 CFR 240.13d-3(d)(1)(i).
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    Paragraph C.3.(f), C.4., and C.5. Currently, these paragraphs: (1) 
Authorize the Nasdaq Board of Directors to make determinations 
necessary to implement Paragraph C of Article Fourth of the 
Certificate, including determinations about stockholder's beneficial 
ownership of shares; (2) empower the Nasdaq Board of Directors to 
demand that any person who is reasonably believed to be the beneficial 
owner of shares in excess of the 5% voting limitation provide 
information about such person's ownership interest; and (3) provide 
that determinations made by the Nasdaq Board of Directors to implement 
Paragraph C of Article Fourth of the Certificate are conclusive and 
binding upon Nasdaq and its stockholders. Nasdaq proposes to amend 
these paragraphs to include conforming references to the Notes.
    Paragraph C.6. Currently, this paragraph provides that the 5% 
voting limitation does not apply to: (1) The NASD or its affiliates 
until such time as the NASD beneficially owns 5% or less of Nasdaq's 
outstanding common stock; or (2) any other person that the Nasdaq Board 
of Director may exempt prior to the time that such person beneficially 
owns more than 5% of the outstanding shares of common stock. The 
paragraph also provides that the Board may not approve an exemption fro 
the 5% limit for a registered broker or dealer or an affiliate thereof 
\7\ or a person that is subject to a statutory disqualification under 
Section 3(a)(29) of the Act.\8\ In addition, before granting an 
exemption, the Nasdaq Board must make certain findings with respect to 
the effect of an exemption on enumerated aspects of Nasdaq's regulatory 
obligations.
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    \7\ A small number of the limited partners of the HFCP IV LPs 
are registered broker/dealers or affiliates of registered broker/
dealers (the ``Broker/Dealer Investors''). The Certificate provides 
that Nasdaq may not exempt a registered broker/dealer or an 
affiliate thereof from the 5% voting limitation. The Certificate 
defines ``affiliate'' with reference to SEC Rule 12b-2, 17 CFR 
240.12b-2, which in turn defines an ``affiliate'' of a specified 
person as ``a person that directly, or indirectly through one or 
more intermediaries, controls, or is controlled by, or is under 
common control with, the person specified.'' The interests of the 
Broker/Dealer Investors in the HFCP IV LPs are minimal. Moreover, 
the limited partnership agreements that govern the HFCP IV LPs 
provide that the limited partners shall take no part in the control 
or management of the business or affairs of the limited partnership, 
nor shall they have any authority to act for or on behalf of the 
limited partnership. Accordingly, the HFCP IV LPs are not affiliates 
of the Broker/Dealer Investors.
    \8\ 15 U.S.C. 78c(a)(39).
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    The proposed rule amendment would add conforming references to the 
Notes and would also provide that the HFCP IV LPs will be exempted from 
the 5% voting limitation if the Nasdaq Board of Directors approves an 
exemption from the 5% voting limitation for any other person (other 
than an exemption granted in connection with the establishment of a 
strategic alliance with another exchange or similar market). This 
exemption would not apply to any other person to whom the HFCP IV LPs 
might transfer Notes and/or common stock.
    Paragraph C.7. Nasdaq represents that this paragraph is a savings 
clause that

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provides that if any portion of Paragraph C. of Article Fourth of the 
Certificate is found to be invalid, the validity of remaining 
provisions shall not be affected. Nasdaq proposes to amend the 
paragraph to include conforming references to the Notes.

Article Ninth

    Nasdaq proposes to amend this article to provide that a two-third 
vote of the holders of outstanding Notes is required: (1) To amend 
Paragraph C. of Article Fourth of the Certificate in a manner that 
would adversely affect the rights of the holders of the Notes without 
similarly affecting the rights of stockholders; or (2) to amend such 
two-thirds voting requirements.

Article Eleventh

    This article authorizes the Nasdaq Board of Directors to consider 
the effect of proposed corporate action on enumerated aspects of 
Nasdaq's regulatory obligations. Nasdaq proposes to amend the provision 
to include conforming references to the Notes.

III. Discussion

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
association.\9\ In particular, the commission believes the proposal is 
consistent with the requirements of Sections 15A(b)(2) and (6) of the 
Act,\10\ which require, among other things, that the Association be so 
organized and have the capacity to be able to carry out the purposes of 
the Act and to comply with, and enforce compliance with, the provisions 
of the Act, and that the Association's rules are designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, and, in general, to protect investors 
and the public interest.
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    \9\ In approving this rule proposal, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \10\ 15 U.S.C. 78o-3(b)(2) and (6).
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    The purpose of this filing is ensure that the holders of the Notes 
are granted the same voting rights, and are subject to the same 
limitations, as the holders of common stock. Therefore, in reviewing 
this filing, it is instructive to consider the commission's original 
findings in approving the Certificate.\11\ In its order approving the 
Certificate, the Commission found that the 5% voting limitation and 
other limitations affecting the control of Nasdaq fulfill the 
obligations arising under sections 15A(b)(2) and (6). Specifically, the 
Commission noted that the limitation on voting shares owned in excess 
of 5% satisfies the requirements of Section 15A(b)(6) because it helps 
to avoid a situation where the integrity of Nasdaq might be compromised 
if the NASD had to choose between taking action against a broker or 
dealer that owned, and could vote, Nasdaq shares in excess of 5%, and 
fulfilling its self-regulatory responsibilities.
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    \11\ See Securities Exchange Act Release No. 42983 (June 26, 
2000), 65 FR 41116 (July 3, 2000) (File No. SR-NASD-00-27).
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    The Commission believes that the changes proposed to Nasdaq's 
Certificate in this filing are consistent with maintaining the 5% 
voting limitation that is currently contained in the Certificate, which 
serves the public interest by ensuring that certain individuals and 
entities cannot gain undue influence over the operations of Nasdaq, and 
are therefore consistent with sections 15A(b)(2) and (6).
    The Commission also finds that the provision that would exempt HFCP 
IV LPs from the 5% voting limitation if the Nasdaq Board of Directors 
approves an exemption from the 5% voting limitation for any other 
person (other than an exemption granted in connection with the 
establishment of a strategic alliance with another exchange or similar 
market) is consistent with section 15A(b)(6) of the Act. The commission 
notes that as originally approved, the Certificate provided that the 
Board could grant exemptions from the voting limitation if certain 
conditions were met.\12\ The proposed amendments do not alleviate or in 
any way change those conditions. They simply provide that if the Board 
finds it appropriate to approve an exemption for one person or entity, 
it must also grant the exemption to HFCP IV LPs assuming they meet the 
same conditions (unless the exemption discussed above for establishment 
of a strategic alliance applies).
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    \12\ Specifically, the Certificate provides that in no event 
shall an exemption from the scaled voting provision be granted to 
(1) a registered broker or dealer, or an affiliate thereof, or (2) 
an individual or entity subject to statutory disqualification under 
section 3(a)(39) of the Act. The Board may approve an exemption from 
the scaled voting provision if the Board determines that granting 
the exemption would (1) Not reasonably be expected to diminish the 
quality of, or public confidence in, the Nasdaq Stock Market or 
other operations of Nasdaq, on the ability to prevent fraudulent and 
manipulative acts and practices and on investors and the public, and 
(2) promote just and equitable principles of trade, foster 
cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, 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.
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IV. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the Act 
\13\ that the proposed rule change (SR-NASD-2001-34) is approved.
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    \13\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-30650 Filed 12-11-01; 8:45 am]
BILLING CODE 8010-01-M