[Federal Register Volume 67, Number 117 (Tuesday, June 18, 2002)]
[Notices]
[Pages 41558-41561]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-15256]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46060; File No. SR-NASD-2002-64]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change and Amendment No. 1 Thereto by 
the National Association of Securities Dealers, Inc. Amending the 
Restated Certificate of Incorporation of the Nasdaq Stock Market, Inc.

June 11, 2002.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 \2\ thereunder, notice is hereby given 
that on May 16, 2002, the National Association of Securities Dealers, 
Inc. (``NASD'' or ``Association'') through its subsidiary, The Nasdaq 
Stock Market, Inc. (``Nasdaq''), submitted to the Securities and 
Exchange Commission (``Commission'') the proposed rule change as 
described in Items I, II, and III below, which Items have been prepared 
by the NASD. Nasdaq filed Amendment No. 1 to the proposed rule change 
on June 3, 2002.\3\ The Commission is publishing this notice to solicit 
comments on the proposed rule change, as amended, from interested 
persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from John M. Yetter, Assistant General Counsel, 
Nasdaq, to Katherine A. England, Assistant Director, Division of 
Market Regulation, Commission, dated May 31, 2002 (``Amendment No. 
1''). In Amendment No. 1, Nasdaq clarified the proposal to reflect 
that the proposed amendments to the Nasdaq Restated Certificate of 
Incorporation (the ``Certificate'') were approved by its 
shareholders at the May 22, 2002 annual meeting. Because the Form 
19b-4 submitted on May 16, 2002 was not complete, the proposed rule 
change was not considered filed. The proposed rule change became 
effective on June 3, 2002, the date on which Amendment No. 1 was 
filed with the Commission.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    On December 5, 2002, the Commission approved SR-NASD-2001-34,\4\ a 
proposed rule change to amend the Certificate, but the amendment 
reflected in SR-NASD-2001-34 was not implemented at that time \5\ 
because under the General Corporation Law of the State of Delaware 
(``Delaware Law''), the amendment must be approved by Nasdaq's 
stockholders.\6\ The proposed rule change contained in this filing--SR-
NASD-2002-64--amends the language approved by the Commission in SR-
NASD-2001-34. Nasdaq submitted the text approved in SR-NASD-2001-34, as 
amended by SR-NASD-2002-64, to its stockholders for approval at the 
2002 annual meeting of stockholders (the ``Annual Meeting''), which was 
held on May 22, 2002, and the stockholders voted to approve the 
changes.\7\
---------------------------------------------------------------------------

    \4\ See Securities Exchange Act Release No. 45135 (December 5, 
2001), 66 FR 64327 (December 12, 2001).
    \5\ See Amendment No. 1, supra note 3.
    \6\ Del. Code Ann. Tit. 8, Sec. 242(b)(2001).
    \7\ See Amendment No. 1, supra note 3.
---------------------------------------------------------------------------

    The text of the proposed rule change is set forth below, which 
includes the amendments approved by the Commission under SR-NASD-2001-
34. New text is italicized; deleted text is bracketed.

[[Page 41559]]

RESTATED CERTIFICATE OF INCORPORATION OF THE NASDAQ STOCK MARKET, INC.
* * * * *
ARTICLE FOURTH
    A. No change.
    B. No change.
    C. 1. No change.
    2. Notwithstanding any other provision of this Restated Certificate 
of Incorporation, but subject to subparagraph 6 of this paragraph C. of 
this Article Fourth, in no event shall (i) any record owner of any 
outstanding Common Stock or Preferred Stock which is beneficially 
owned, directly or indirectly, as of any record date for the 
determination of stockholders and/or holders of Notes entitled to vote 
on any matter, or (ii) any holder of any Notes which are beneficially 
owned, directly or indirectly, as of any record date for the 
determination of stockholders and/or holders of Notes entitled to vote 
on any matter, by a person (other than an Exempt Person) who 
beneficially owns shares of Common Stock, Preferred Stock and/or Notes 
(``Excess Shares and/or Notes'') in excess of five percent (5%) of the 
then-outstanding shares of [Common Stock] stock generally entitled to 
vote as of the record date in respect of such matter, be entitled or 
permitted to vote any Excess Shares and/or Notes on such matter. For 
all purposes hereof, any calculation of the number of shares of [Common 
Stock] stock outstanding at any particular time, including for purposes 
of determining the particular percentage of such outstanding shares of 
[Common Stock] stock of which any person is the beneficial owner, shall 
be made in accordance with the last sentence of Rule 13d-3(d)(1)(i) of 
the General Rules and Regulations under the Securities Exchange Act of 
1934, as amended (the ``Exchange Act''), as in effect on the date of 
filing this Restated Certificate of Incorporation.
    3. (a)-(c) No change.
    (d) ``Exempt Person'' shall mean Nasdaq or any Subsidiary of 
Nasdaq, in each case including, without limitation, in its fiduciary 
capacity, or any employee benefit plan of Nasdaq or of any Subsidiary 
of Nasdaq, or any entity or trustee holding [Common Stock] stock for or 
pursuant to the terms of any such plan or for the purpose of funding 
any such plan or funding other employee benefits for employees of 
Nasdaq or of any Subsidiary of Nasdaq.
    (e) No change.
    (f) The Board shall have the power to construe and apply the 
provisions of this paragraph C. of this Article Fourth and to make all 
determinations necessary or desirable to implement such provisions, 
including, but not limited to, matters with respect to (1) the number 
of shares of [Common Stock] stock beneficially owned by any person, (2) 
the number of Notes beneficially owned by any person, (3) whether a 
person is an Affiliate of another, (4) whether a person has an 
agreement, arrangement or understanding with another as to the matters 
referred to in the definition of beneficial ownership, (5) the 
application of any other definition or operative provision hereof to 
the given facts, or (6) any other matter relating to the applicability 
or effect of this paragraph C. of this Article Fourth.
    4.-5. No change.
    6. Notwithstanding anything herein to the contrary, subparagraph 2 
of this paragraph C. of this Article Fourth shall not be applicable to 
any Excess Shares and/or Notes beneficially owned by (a) the NASD or 
its Affiliates until such time as the NASD beneficially owns five 
percent (5%) or less of the outstanding shares of [Common Stock] stock 
and/or Notes entitled to vote on the election of a majority of 
directors at such time, (b) any other person as may be approved for 
such exemption by the Board prior to the time such person beneficially 
owns more than five percent (5%) of the outstanding shares of [Common 
Stock] stock and/or Notes entitled to vote on the election of a 
majority of directors at such time or (c) Hellman & Friedman Capital 
Partners IV, L.P., H&F International Partners IV-A, L.P., [Hellman & 
Friedman] H&F International Partners IV-B, L.P., and H&F Executive 
Fund, L.P. if the Board has approved an exemption for any other person 
pursuant to Section 6(b) of this paragraph C. of this Article Fourth 
(other than an exemption granted in connection with the establishment 
of a strategic alliance with another exchange or similar market). The 
Board, however, may not approve an exemption under Section 6(b): (i) 
for a registered broker or dealer or an Affiliate thereof (provided 
that, for these purposes, an Affiliate shall not be deemed to include 
an entity that either owns ten percent or less of the equity of a 
broker or dealer, or the broker or dealer accounts for one percent or 
less of the gross revenues received by the consolidated entity); or 
(ii) an individual or entity that is subject to a statutory 
disqualification under Section 3(a)(39) of the Exchange Act. The Board 
may approve an exemption for any other stockholder or holder of Notes 
if the Board determines that granting such exemption would (A) not 
reasonably be expected to diminish the quality of, or public confidence 
in, The Nasdaq Stock Market or the other operations of Nasdaq, on the 
ability to prevent fraudulent and manipulative acts and practices and 
on investors and the public, and (B) 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.
    7. No change.
* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, Nasdaq 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. Nasdaq 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
    On May 3, 2001, Nasdaq sold $240 million of 4.0% Convertible 
Subordinated Notes due 2006 (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''). The Notes are convertible at any 
time during a five-year period into shares of Nasdaq common stock at a 
conversion price of $20 per share; thus, the Notes purchased by the 
HFCP IV LPs would be convertible into 12,000,000 shares of Nasdaq 
common stock. On December 5, 2001, the Commission approved a proposed 
rule change--SR-NASD-2001-34--to amend the Certificate to afford the 
holders of the Notes the right to vote with Nasdaq stockholders.\8\
---------------------------------------------------------------------------

    \8\ See supra note 4.
---------------------------------------------------------------------------

    The Certificate amendment approved by the Commission in SR-NASD-
2001-34 did not take effect at the time of approval by the Commission, 
because approval by Nasdaq stockholders at the Annual Meeting was also 
required. Under the Certificate as in effect prior

[[Page 41560]]

to stockholder approval, a person who beneficially owns shares of 
common stock in excess of 5% of the outstanding shares of common stock 
may not vote the excess shares.\9\ The 5% voting limitation does not 
apply, however 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 Directors (the 
``Nasdaq Board'') may exempt prior to the time that such person 
beneficially owns more than 5% of Nasdaq's outstanding common stock. 
Under the Certificate, the Nasdaq Board must make certain findings with 
respect to the effect on an exemption on enumerated aspects of Nasdaq's 
regulatory obligations. Moreover, the Nasdaq Board may not approve an 
exemption for a registered broker or dealer or an affiliate thereof or 
a person that is subject to a statutory disqualification under Section 
3(a)(39) of the Act.\10\
---------------------------------------------------------------------------

    \9\ See Amendment No. 1, supra note 3.
    \10\ 15 U.S.C. 78c(a)(39).
---------------------------------------------------------------------------

    Under the amendments approved by the Commission in SR-NASD-2001-34, 
the Notes will be granted direct voting rights, but the 5% voting 
limitation will be made applicable to the Notes as well as the common 
stock. However, the HFCP IV LPs will be exempted from the 5% voting 
limitation if the Nasdaq Board 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).
    Thus, prior to the Annual Meeting, holders of the Notes did not 
have the right to vote with Nasdaq stockholders. They could become 
stockholders (with voting rights) by paying the conversion price and 
converting the Notes into common stock, but would, like other 
stockholders, be subject to the 5% voting limitation. As a result of 
stockholder approval of the proposed rule change approved by the 
Commission in SR-NASD-2001-34, the Notes have been given direct voting 
rights, but are also subject to the 5% voting limitation.\11\
---------------------------------------------------------------------------

    \11\ See Amendment No. 1, supra note 3.
---------------------------------------------------------------------------

    On March 8, 2002, Nasdaq completed a two-stage repurchase of Nasdaq 
common stock owned by the NASD, in exchange for cash, 1,338,402 shares 
of Series A Cumulative Preferred Stock (``Series A Preferred''), and 
one share of Series B Preferred Stock (``Series B Preferred''). Under 
Delaware Law and the Certificate, the Nasdaq Board may issue up to 
30,000,000 shares of preferred stock in one or more series, and may 
establish the designation, powers, preferences and rights of each 
series of preferred stock at the time of issuance, without stockholder 
approval. However, under Delaware Law, the instrument by which the 
Nasdaq Board establishes the designation, powers, preferences, and 
rights of a series of preferred stock has the effect of an amendment to 
the Certificate.\12\ Accordingly, on March 8, 2002, Nasdaq filed with 
the Commission an immediately effective proposed rule change, comprised 
of Certificates of Designation, Preferences and Rights for the Series A 
Preferred and Series B Preferred.\13\
---------------------------------------------------------------------------

    \12\ Del. Code Ann. Tit. 8, Sec. 151(g)(2001).
    \13\ See Securities Exchange Act Release No. 45638 (March 25, 
2002), 67 FR 15268 (March 29, 2002).
---------------------------------------------------------------------------

    The Series B Preferred is a single share designed to ensure that 
the NASD maintains voting control over Nasdaq until Nasdaq is 
registered as a national securities exchange. Accordingly, it confers 
upon the NASD the right to cast a number of votes that, together with 
other votes entitled to be cast by the NASD, constitute a majority of 
the total votes entitled to be cast at a particular time. The Series B 
Preferred is not transferable and must be redeemed if Nasdaq is 
registered as a national securities exchange. The Series A Preferred 
pays a dividend and is generally non-voting, although it conveys 
limited voting rights in the event of the failure to pay a timely 
dividend.
    Under the Certificate as amended under SR-NASD-2001-34, voting 
preferred stock is not subject to the 5% voting limitation that applies 
to common stock and that also applies to the Notes following 
stockholder approval of voting rights for the Notes.\14\ This gap in 
the coverage of the 5% limitation does not pose regulatory issues with 
respect to the NASD's ownership of the Series A Preferred and Series B 
Preferred because the NASD is required to control Nasdaq until Nasdaq 
is registered as a national securities exchange, a fact that is 
reflected in the automatic exemption from the 5% limitation that the 
NASD receives under the Certificate (until such time as its voting 
interest falls below 5%). Nevertheless, Nasdaq believes that the 
Certificate should be amended to provide that voting preferred stock is 
subject to the same limitations as common stock (and the Notes). Under 
this proposed rule change,\15\ Nasdaq would be unable to issue any form 
of voting securities that are not subject to the 5% limitation, unless 
the Nasdaq Board either (i) adopted an amendment to its Certificate 
that was filed with, and if necessary, approved by, the Commission and 
approved by Nasdaq's stockholders, or (ii) waived the application of 
the 5% limitation to a particular security holder prior to the time 
that such person acquired a 5% interest.\16\
---------------------------------------------------------------------------

    \14\ See Amendment No. 1, supra note 3.
    \15\ Id.
    \16\ As noted above, the Nasdaq Board must make certain findings 
before granting a waiver and may not grant a waiver to a broker or 
dealer or an affiliate thereof or a person that is subject to a 
statutory disqualification.
---------------------------------------------------------------------------

2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the Act, including Sections 15A(b)(2) \17\ and 15A(b)(6) of the 
Act,\18\ which require, among other things, that the NASD 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. Nasdaq believes that the changes proposed to 
its Certificate are consistent with the intent of 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. In its 
orders relating to the Certificate, the Commission found that the 5% 
voting limitation and other limitations affecting the control of Nasdaq 
fulfill the obligations arising under the Act.\19\
---------------------------------------------------------------------------

    \17\ 15 U.S.C. 78o-3(b)(2).
    \18\ 15 U.S.C. 78o-3(b)(6).
    \19\ See supra note 4; Securities Exchange Act Release No. 42983 
(June 26, 2000), 65 FR 41116 (July 3, 2000).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    Nasdaq believes that the proposed rule change will not 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

    The Exchange neither solicited nor received written comments.

[[Page 41561]]

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act \20\ and subparagraph (f)(3) of Rule 19b-4 \21\ 
thereunder because it is concerned solely with the administration of 
the self-regulatory organization. At any time within 60 days of the 
filing of such proposed rule change, the Commission may summarily 
abrogate such rule change if it appears to the Commission that such 
action is necessary or appropriate in the public interest, for the 
protection of investors, or otherwise in furtherance of the purposes of 
the Act.\22\
---------------------------------------------------------------------------

    \20\ 15 U.S.C. 78s(b)(3)(A).
    \21\ 17 CFR 240.19b-4(f)(3).
    \22\ Because the Form 19b-4 submitted on May 16, 2002 was not 
complete, the proposed rule change was not considered filed. The 
proposed rule change became effective on June 3, 2002, the date on 
which Amendment No. 1 was filed with the Commission. In addition, 
for purposes of calculating the 60-day abrogation date, the 
Commission considers the 60-day period to have commenced on June 3, 
2003, the date Nasdaq filed Amendment No. 1.
---------------------------------------------------------------------------

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, is consistent with the Act. Persons making written 
submissions should file six copies thereof with the Secretary, 
Securities and Exchange Commission, 450 Fifth Street, NW, Washington, 
DC 20549-0609. 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. Copies of the filing 
will also be available for inspection and copying at the principal 
office of the Association. All submissions should refer to File No. SR-
NASD-2002-64 and should be submitted by July 9, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\23\
---------------------------------------------------------------------------

    \23\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-15256 Filed 6-17-02; 8:45 am]
BILLING CODE 8010-01-P