[Federal Register Volume 69, Number 240 (Wednesday, December 15, 2004)]
[Notices]
[Pages 75100-75102]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-3650]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50823; File No. SR-NASD-2004-168]


Self-Regulatory Organizations; Notice of Filing of and Immediate 
Effectiveness of Proposed Rule Change by the National Association of 
Securities Dealers, Inc. Relating to Certificate of Designation for 
Preferred Stock of The Nasdaq Stock Market, Inc.

December 8, 2004.
    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 November 1, 2004 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'') the proposed rule change as 
described in items I, II, and III below, which items have been prepared 
by Nasdaq. Pursuant to Rule 19b-4(f)(3),\3\ Nasdaq has designated this 
filing as one solely concerned with the administration of the self-
regulatory organization, and as such, the filing is immediately 
effective. The Commission is publishing this notice to solicit comments 
on the proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 17 CFR 240.19b-4(f)(3).
---------------------------------------------------------------------------

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

    Nasdaq is filing with the Commission a Certificate of Designations, 
Preferences and Rights (``Certificate of Designation'') of Series C 
Cumulative Preferred Stock (``Series C Preferred'') authorized to be 
issued to the NASD. The issuance of the Series C Preferred is part of a 
transaction between the NASD and Nasdaq whereby 1,338,402 shares of 
Nasdaq's Series A Cumulative Preferred

[[Page 75101]]

Stock (``Series A Preferred'') owned by the NASD (representing all of 
the outstanding shares of Series A Preferred) will be exchanged for 
1,338,402 shares of Nasdaq's Series C Preferred. The exchange of the 
Series A Preferred for the Series C Preferred is designed, among other 
things, to reduce Nasdaq's current dividend obligations to the NASD 
since the Series C Preferred has a lower initial dividend rate than the 
Series A Preferred, subject to payment of an additional dividend in 
certain circumstances.
    Under Section 151(g) of the General Corporation Law of the State of 
Delaware (``Delaware Law''), such Certificate of Designation is deemed 
to be an amendment to Nasdaq's Restated Certificate of Incorporation. 
Pursuant to Exchange Act Rule 19b-4(f)(3),\4\ Nasdaq has designated 
this filing as one solely concerned with the administration of the 
self-regulatory organization because the authorization and issuance of 
the Series C Preferred results in no substantive change in the NASD's 
control of Nasdaq, and as such, the filing is immediately effective.
---------------------------------------------------------------------------

    \4\ 17 CFR 240.19b-4(f)(3).
---------------------------------------------------------------------------

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 1, 
2, and 3 below, of the most significant aspects of such statements.

1. Purpose

    Nasdaq is filing the Certificate of Designation described below. 
Under Article Fourth, Paragraph B of Nasdaq's Restated Certificate of 
Incorporation, Nasdaq's Board of Directors may authorize the issuance 
of preferred stock and fix its designation, powers, preferences and 
rights, as well as any qualifications, limitations, and restrictions on 
it. Under Delaware Law, such Certificate of Designation is deemed to be 
an amendment to Nasdaq's Restated Certificate of Incorporation, and as 
such, Nasdaq is filing the Certificate of Designation with the 
Commission.
    The issuance of the Series C Preferred is part of a transaction 
between the NASD and Nasdaq whereby 1,338,402 shares of Series A 
Preferred owned by the NASD (representing all of the outstanding shares 
of Series A Preferred) will be exchanged for 1,338,402 shares of 
Nasdaq's Series C Preferred. The principal differences between the 
Series A Preferred and the Series C Preferred concern the amount and 
timing of dividend payments by Nasdaq to the NASD. The Series A 
Preferred carries an annual dividend rate of 7.6% for the year 
commencing March 2003, increasing to 10.6% for years thereafter. The 
Series C Preferred carries an annual dividend rate of 3.0% for the 
first two years from the applicable calculation date, increasing to 
10.6% for periods thereafter. The Certificate of Designation sets forth 
certain situations in which the NASD will be entitled to an additional 
dividend amount upon redemption of the outstanding Series C Preferred, 
which Nasdaq may elect to pay in cash or shares of its common stock. 
Both the Series A Preferred and C Preferred are non-voting unless 
Nasdaq fails to pay a timely dividend. Thus, as in the case of the 
Series A Preferred, if Nasdaq fails to pay a timely dividend on the 
Series C Preferred, Nasdaq must increase the size of its Board to add 
two directors elected by the holders of the Series C Preferred.\5\ 
Also, as in the case of the Series A Preferred, such directors would be 
required to resign upon the payment of the dividend or the redemption 
of the Series C Preferred. The NASD may not transfer the Series C 
Preferred without the prior written consent of Nasdaq for a period of 
one year from its issuance, which is the same initial transfer 
restriction period as was contained in the Series A Preferred.
---------------------------------------------------------------------------

    \5\ Nasdaq continues to discuss with the Commission staff how 
Nasdaq intends to meet its obligation for fair representation of 
members on its Board under section 6(b)(3) of the Act if Nasdaq 
obtains approval of its exchange registration application. As a 
result of these discussions, Nasdaq may submit to the Commission 
amendments to its By-Laws with respect to its Board composition. The 
potential By-laws amendments under discussion could require the 
election of additional Board members if the Series C Preferred 
holder's right to elect Board members is triggered to ensure that 
the fair representation obligation is met at all times. December 1, 
2004, telephone conference between John Zecca, Associate General 
Counsel, Nasdaq, and Geoff Pemble, Special Counsel, Division of 
Market Regulation, Commission. In addition, the Commission recently 
proposed rules that pertain to the governance, administration, 
transparency and ownership of self-regulatory organizations, which 
include compositional requirements for the board of directors of 
self-regulatory organizations. See Securities Exchange Act Release 
No. 50699 (November 18, 2004), 69 FR 71126 (December 8, 2004).
---------------------------------------------------------------------------

    The exchange of Series A Preferred for Series C Preferred and the 
issuance of the Series C Preferred will result in no substantive change 
in NASD's control of Nasdaq since neither series of preferred stock has 
voting rights, except in the limited circumstances discussed above. The 
Series C Preferred also will have no effect on the voting trust that 
governs the warrants to purchase Nasdaq common stock that were sold by 
the NASD in two private placements that closed in June 2000 and January 
2001.

2. Statutory Basis

    Nasdaq believes that the proposed rule change is consistent with 
the provisions of section 15A(b)(2) and (6) of the Act,\6\ 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 be 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 issuance of this preferred 
stock will result in no substantive change in its current relationship 
to the NASD; as under the current ownership structure, the NASD will 
continue to control Nasdaq until exchange registration.
---------------------------------------------------------------------------

    \6\ 15 U.S.C. 78o-3(b)(2) and (6).
---------------------------------------------------------------------------

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

    Nasdaq 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.

4. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Nasdaq neither solicited nor received comments on the proposed rule 
change.

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

    The foregoing rule change has become effective pursuant to section 
19(b)(3)(A) of the Act \7\ and subparagraph (f)(3) of Securities 
Exchange Act Rule 19b-4 thereunder because it is concerned solely with 
the administration of the self-regulatory organization.\8\ 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

[[Page 75102]]

the protection of investors, or otherwise in furtherance of the 
purposes of the Act.
---------------------------------------------------------------------------

    \7\ 15 U.S.C. 78s(b)(3)(A).
    \8\ 17 CFR 240.19b-4(f)(3).
---------------------------------------------------------------------------

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-NASD-2004-168 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-NASD-2004-168. 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 
NASD. 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-NASD-2004-168 and 
should be submitted on or before January 5, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
---------------------------------------------------------------------------

    \9\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

J. Lynn Taylor,
Assistant Secretary.
 [FR Doc. E4-3650 Filed 12-14-04; 8:45 am]
BILLING CODE 8010-01-P