[Federal Register Volume 69, Number 84 (Friday, April 30, 2004)]
[Notices]
[Pages 23833-23835]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-9789]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49611; File No. SR-BSE-2004-10]


Self-Regulatory Organizations; Order Granting Approval of 
Proposed Rule Change by the Boston Stock Exchange, Inc., and Notice of 
Filing and Granting Accelerated Approval to Amendment No. 1 To Permit 
the Separation of the Chairman and Chief Executive Officer Positions

April 23, 2004.

I. Introduction

    On March 2, 2004, the Boston Stock Exchange, Inc. (``BSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``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 Constitution to permit the separation 
of the functions of Chairman and of Chief Executive Officer (``CEO''). 
The proposed rule change was published for comment in the Federal 
Register on March 17, 2003.\3\ The

[[Page 23834]]

Commission received no comments on the proposal.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 49434, 69 FR 13922 
(March 24, 2004).
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    Subsequently, on April 14, 2004, the Exchange filed Amendment No. 1 
to the proposed rule change.\4\ In Amendment No. 1, the Exchange 
proposes several changes to the original filing. Amendment No. 1 
clarifies the duties the Chairman and the CEO would perform when those 
positions are held by the same person or by different persons. 
Amendment No. 1 also incorporates a provision governing executive 
sessions of the Board, and bars the CEO from attending all such 
executive sessions and the Chairman from attending such executive 
sessions relating to personnel or compensation issues of the Chairman.
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    \4\ See letter from John Boese, Vice President, Legal and 
Compliance, BSE, to Nancy J. Sanow, Assistant Director, Division of 
Market Regulation, Commission, dated April 13, 2004 (``Amendment No. 
1''). Amendment No. 1 superceded and replaced the original filing in 
its entirety.
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    This order approves the proposed rule change, as amended; grants 
accelerated approval to Amendment No. 1; and solicits comments from 
interested persons on Amendment No. 1.

II. Description of Proposed Rule Change

    The BSE proposes to amend its Constitution to permit the separation 
of the Chairman and CEO positions. The separation would not be 
mandatory but, according to the Exchange, would be an option to be 
utilized by the Exchange's Board as deemed necessary and/or prudent to 
enhance the governance of the Exchange. The Exchange proposes the 
flexibility to separate the Chairman and CEO positions in the event the 
BSE's Board determines such a separation to be practical, in light of 
current or external events. The Exchange represents that any such 
separation also would allow for the independence of the Exchange's 
regulatory function from its marketplace function.\5\
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    \5\ The Exchange noted in its filing that it did not submit this 
proposal in response to any internal issues arising from its current 
governance structure. Rather, the Exchange stated that it sought to 
be proactive in concert with changes occurring in the control 
mechanisms of other market centers, particularly the New York Stock 
Exchange (``NYSE''). The Exchange noted that it was not implementing 
all of the changes recently put in place by the NYSE because the 
Exchange's size would make such a governance structure unwieldy and 
unworkable.
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    To implement the possible separation of the two roles, the proposed 
changes to the BSE's Constitution would delineate the duties and 
functions of the Chairman and of the CEO in the event two individuals 
or the same individual should hold these positions. If the Chairman and 
CEO are not the same person, then according to the proposed revisions 
to the Constitution, the Chairman, as an executive officer of the 
Exchange, among other duties, would: (1) Preside over all meetings of 
the Board; (2) be responsible to the Board for the management of the 
BSE's regulatory affairs; (3) be responsible for management of the 
regulatory affairs of all exchange facilities, subsidiaries, or other 
legal entities to which the Exchange is a party; and (4) act as Board 
liaison to the Exchange's CEO and management.\6\ Similarly, if the 
Chairman and CEO positions are held by different individuals, then the 
CEO, among other duties, would: (1) Be responsible for the management 
and administration of the affairs of the Exchange's marketplace 
functions; (2) not participate in executive sessions of the Board; and 
(3) be subject to the authority of the Board.
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    \6\ The Exchange also proposes a Constitutional provision to 
clarify that the general powers of the Board also would include the 
administration of the regulatory function of the Exchange. Thus, 
while the person serving in the capacity of Chairman or Chairman/CEO 
would be responsible for the management of the Exchange's regulatory 
affairs, the Exchange's Board would continue to have ultimate 
oversight responsibility for the Exchange's regulatory functions.
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    If the Chairman and CEO are the same person, the proposal provides 
that the combined Chairman/CEO, among other duties, would: (1) Preside 
over all meetings of the Board; (2) be responsible to the Board for the 
management of the BSE's regulatory affairs; (3) be responsible for the 
management of the regulatory affairs of all Exchange facilities, 
subsidiaries, or other legal entities to which the Exchange is a party; 
(4) be responsible for the management and administration of the affairs 
of the Exchange's marketplace functions; and (5) be subject to the 
authority of the Board.
    To further separate the CEO role from the regulatory functions of 
the Exchange, the Exchange also proposes that if a single individual 
serves as both the Chairman and CEO, the Board must designate a lead 
director to preside over executive sessions of the Board. The Chairman/
CEO would not be permitted to participate in executive sessions of the 
Board. In addition, the Board would publicly disclose the lead 
director's name and a means by which interested parties may communicate 
with the lead director.
    The Exchange further proposes to clarify when an executive session 
of the Board would be called. The Exchange proposes to add a provision 
to the Constitution noting that the Board will have the power to 
determine when to conduct proceedings in executive session, and that 
executive session proceedings will be commenced for matters involving 
the regulation of the Exchange, the compensation of the Chairman, 
Exchange staff personnel matters, or any other matter that the Board 
determines to require confidential and sensitive treatment. The 
proposal requires that the Chairman recuse himself from any executive 
session proceedings involving personnel or compensation issues of the 
Chairman. Additionally, the CEO would not be permitted to attend any 
executive sessions of the Board.

III. Discussion

    The Commission has reviewed carefully the proposed rule change, as 
amended, and finds that the proposed rule change, as amended, is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities exchange 
and, in particular, the requirements of section 6(b) of the Act.\7\ 
Specifically, the Commission finds that the proposed rule change, as 
amended, is consistent with section 6(b)(1) of the Act,\8\ which 
requires that the exchange be ``so organized and [have] the capacity to 
carry out the purposes of [the Act].'' The Commission also finds that 
the proposed rule change, as amended, is consistent with Section 
6(b)(5) of the Act \9\ in that it is designed, among other things to 
promote just and equitable principles of trade; to remove impediments 
to and perfect the mechanism of a free and open market and a national 
market system; and in general, to protect investors and the public 
interest.
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    \7\ 15 U.S.C. 78f.
    \8\ 15 U.S.C. 78f(b)(1).
    \9\ 15 U.S.C. 78f(b)(5).
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    In the Commission's view, the Exchange has taken an initial step 
toward strengthening its governance structure by providing itself with 
the flexibility to separate the functions of Chairman and CEO.\10\ 
According to the Exchange, any such separation would allow for greater 
independence of the Exchange's regulatory function from its marketplace 
function. Although the Exchange has retained the ability to have the 
functions of Chairman and CEO reside in a single individual, the 
Commission notes that the Exchange's proposal has incorporated several 
features that are designed to help

[[Page 23835]]

protect the integrity of the Exchange's regulatory function.
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    \10\ The Commission is in the process of reviewing a range of 
governance issues relating to self-regulatory organizations 
(``SROs'') and, depending on the results of that review, may 
determine further steps designed to strengthen the governance of 
SROs are necessary.
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    The Commission notes that the proposal sets forth the respective 
duties of the Chairman and the CEO in the event two individuals hold 
these positions. In this situation, the Exchange's proposal clarifies 
that the Chairman is responsible for the management of the BSE's 
regulatory function, while the CEO is responsible for the management 
and administration of the Exchange's marketplace function. In the 
Commission's view, the proposed rule change is designed to help improve 
the governance structure of the Exchange by ensuring that the 
Exchange's regulatory function is cordoned off from management of the 
marketplace function when two individuals hold the positions of 
Chairman and CEO.
    In addition, the Exchange proposes to implement other revisions to 
its Constitution that are designed to reduce any potential conflicts of 
interest between its regulatory responsibilities and its marketplace 
functions, in the event a single individual holds the positions of 
Chairman and CEO. In this case, the Chairman/CEO would not be permitted 
to participate in Board executive sessions and a lead director would be 
appointed to preside over such sessions. Moreover, the Board must 
disclose the lead director's name and a means by which interested 
parties may communicate with the lead director. The proposed changes to 
the Constitution would require executive sessions to be commenced for 
matters involving the regulation of the Exchange, the compensation of 
the Chairman, Exchange staff personnel matters, or any other matter 
that the Board determines requires confidential and sensitive 
treatment. The Chairman would be recused from sessions involving 
personnel or compensation issues relating to the Chairman. The 
Commission believes that these additional safeguards proposed by the 
Exchange are designed to further the goal of independence of the 
Exchange's regulatory duties from its business functions.
    In light of the foregoing reasons, the Commission finds that the 
proposed rule change, as amended, is consistent with the Act.\11\
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    \11\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
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IV. Accelerated Approval of Amendment No. 1

    The Commission finds good cause for approving Amendment No. 1 prior 
to the thirtieth day after the date of publication of notice of filing 
thereof in the Federal Register.
    Amendment No. 1 clarifies the proposed changes to the BSE's 
Constitution by setting forth expressly the duties of the Chairman and 
the CEO in the instances when those positions are held by the same 
individual or by two individuals. In addition, Amendment No. 1 
incorporates provisions relating to executive sessions of the Board and 
specified that when the same individual serves as both Chairman and 
CEO, a lead director must be designated to preside over such sessions. 
Amendment No. 1 also specifies the kinds of matters, i.e., the 
regulation of the Exchange, the compensation of the Chairman, Exchange 
staff personnel matters, or any other matter that the Board determines 
to require confidential and sensitive treatment, for which the Board 
must commence executive session proceedings. The proposed revisions in 
Amendment No. 1 were made for the purposes of clarifying the duties of 
Chairman and CEO, whether the same individual or two individuals hold 
those positions, and for clarifying the separation between the 
Exchange's regulatory and market functions. Amendment No. 1 raises no 
new issues.
    Accordingly, the Commission finds good cause, consistent with 
sections 6(b)(1),\12\ 6(b)(5) \13\ and 19(b)(2) \14\ of the Act, to 
accelerate approval of Amendment No. 1 to the proposed rule change.
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    \12\ 15 U.S.C. 78f(b)(1).
    \13\ 15 U.S.C. 78f(b)(5).
    \14\ 15 U.S.C. 78s(b)(2).
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V. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 1, including whether Amendment No. 1 
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-2004-10 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. 
Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, 
NW., Washington, DC 20549-0609.
    All submissions should refer to File Number SR-BSE-2004-10. 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 Section, 450 Fifth 
Street, NW., Washington, DC 20549. Copies of such filing also will be 
available for inspection and copying at the principal office of the 
BSE. 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-
2004-10 and should be submitted on or before May 21, 2004.

VI. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\15\ that the proposed rule change (SR-BSE-2004-10) be, and it 
hereby is, approved, and that Amendment No. 1 to the proposed rule 
change be, and hereby is, approved on an accelerated basis.
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    \15\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-9789 Filed 4-29-04; 8:45 am]
BILLING CODE 8010-01-P