[Federal Register Volume 69, Number 250 (Thursday, December 30, 2004)]
[Notices]
[Pages 78486-78499]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-28600]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50927; File No. SR-Amex-2004-50]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change and Amendment Nos. 1, 2, and 3 Thereto and Notice of Filing and 
Order Granting Accelerated Approval to Amendment Nos. 4 and 6 to the 
Proposed Rule Change by the American Stock Exchange LLC Relating to the 
National Association of Securities Dealers, Inc.'s Sale of Its Interest 
in the American Stock Exchange LLC to The Amex Membership Corporation

December 23, 2004.

I. Introduction

    On June 30, 2004, the American Stock Exchange LLC (``Amex'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934,\1\ as amended (the ``Act''), and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend its Constitution and 
certain other organizational documents. On July 15, 2004, the Exchange 
filed Amendment No. 1 to the proposal.\3\ On July 21, 2004, the 
Exchange filed Amendment No. 2 to the proposal.\4\ The proposed rule 
change was published for comment in the Federal Register on July 28, 
2004.\5\ The Commission received no comment letters regarding the 
proposed rule change. On August 16, 2004, Amex filed Amendment No. 3 to 
the proposal.\6\ On September 1, 2004, the Exchange filed Amendment No. 
4 to the proposed rule change.\7\ On December 17, 2004, the Exchange 
filed Amendment No. 5 to the proposed rule change.\8\ The Exchange 
withdrew Amendment No. 5 on December 21, 2004. On December 22, 2004, 
the Exchange filed Amendment No. 6 to the proposed rule change.\9\ This

[[Page 78487]]

order approves the proposed rule change, as amended, grants accelerated 
approval to Amendment Nos. 4 and 6 to the proposed rule change, and 
solicits comments from interested persons on Amendment Nos. 4 and 6.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Michael J. Ryan, Jr., Executive Vice 
President and General Counsel, Amex, to Nancy Sanow, Assistant 
Director, Division of Market Regulation (``Division''), Commission, 
dated July 13, 2004 (``Amendment No. 1''). Amendment No. 1 replaced 
Amex's original filing in its entirety.
    \4\ See letter from Michael J. Ryan, Jr., Executive Vice 
President and General Counsel, Amex, to Nancy Sanow, Assistant 
Director, Division, Commission, dated July 20, 2004 (``Amendment No. 
2''). Amendment No. 2 corrected formatting errors in the Amex 
Constitution, the Amended and Restated Exchange Limited Liability 
Company Agreement, the Second Restated Certificate of Incorporation 
of The Amex Membership Corporation, and the Amended and Restated By-
Laws of The Amex Membership Corporation that were filed with 
Amendment No. 1; no substantive changes to these documents were made 
in Amendment No. 2.
    \5\ See Securities Exchange Act Release No. 50057 (July 22, 
2004), 69 FR 45091 (the ``Amex Notice'').
    \6\ See letter from Michael J. Ryan, Jr., Executive Vice 
President and General Counsel, Amex, to Nancy Sanow, Assistant 
Director, Division, Commission, dated August 13, 2004 (``Amendment 
No. 3''). In Amendment No. 3, Amex revised Section 2 of its Form 
19b-4 (Procedures of the Self-Regulatory Organization) to reflect 
the Exchange Board of Governors' action approving the final forms of 
the governance documents submitted as part of the proposal. 
Amendment No. 3 is a technical amendment, and, therefore, not 
subject to notice and comment.
    \7\ See letter from Bruce Ferguson, Associate General Counsel, 
Amex, to Nancy Sanow, Assistant Director, Division, Commission, 
dated August 30, 2004 (``Amendment No. 4''). In Amendment No. 4, 
Amex amended Section 3 of Article II of the Amex Constitution to 
clarify that Exchange Board members, among other things, would be 
required to take into consideration the self-regulatory function of 
the Exchange and the Exchange's obligations (and their obligations) 
under the Act. Exhibit A to Amendment No. 4, which sets forth these 
changes, is available on the Commission's Web site (http://www.sec.gov/rules/sro.shtml). The changes proposed in Amendment No. 
4 have been incorporated into this order.
    \8\ See letter from Michael J. Ryan, Jr., Executive Vice 
President and General Counsel, Amex, to Nancy Sanow, Assistant 
Director, Division, Commission, dated December 17, 2004 (``Amendment 
No. 5'').
    \9\ See Amendment No. 6, dated December 22, 2004 (``Amendment 
No. 6''). Amendment No. 6 amends Sections 4(a) and 4(d) of Article 
II of the Amex Constitution, and related portions of Form 19b-4, to 
provide that the Chief Regulatory Officer will report only to the 
Regulatory Oversight Committee. Amendment No. 6 also sets forth 
certain Undertakings applicable to Amex. Exhibit 5 to Amendment No. 
6, which sets forth these changes to Sections 4(a) and 4(d) of 
Article II of the Amex Constitution and the Undertakings, is 
available on the Commission's Web site (http://www.sec.gov/rules/sro.shtml). These changes and the Undertakings have been 
incorporated into this order. (The Commission further notes that the 
Undertakings are Exhibit E to the Form 19b-4.)
---------------------------------------------------------------------------

II. Description of Proposed Rule Change

    Ownership interests in the American Stock Exchange LLC currently 
consist of a Class A Participation Interest held by The Amex Membership 
Corporation (``MC'') and a Class B Participation Interest held by New 
NASD Holdings, Inc. (``NAHO''), a wholly owned subsidiary of the 
National Association of Securities Dealers, Inc. (``NASD''). Pursuant 
to a proposed transaction between the parties (``Transaction''), MC 
will become the sole owner of the Exchange through the acquisition of 
100% of the Class B Participation Interest in the Exchange from NAHO. 
To implement the terms of the Transaction and institute new governance 
structures for the Exchange and MC, the Exchange has filed amendments 
to its Constitution, the Second Restated Certificate of Incorporation 
of MC (``MC Certificate of Incorporation''), the Restated By-Laws of MC 
(``MC Bylaws''), and the Amended & Restated Exchange Limited Liability 
Company Agreement (``LLC Agreement''). Each of these documents will 
become effective upon the closing of the Transaction.

A. The Transaction

    Through MC Acquisition Sub, a corporate subsidiary, MC will acquire 
100% of the Class B Participation Interest in the Exchange from 
NAHO.\10\ Thus, upon consummation of the Transaction, MC will 
beneficially own 100% of the equity of the Exchange. Following the 
consummation of the Transaction, the Class B Participation Interest 
will represent a non-voting interest in the Exchange; the Class A 
Participation Interest, which will continue to be held directly by MC, 
will represent the sole voting interest in the Exchange. In addition, 
all rights to trade through the facilities of the Exchange will 
continue to be owned by MC.
---------------------------------------------------------------------------

    \10\ According to the Exchange, MC Acquisition Sub will be 
formed for the sole purpose of acquiring and holding the Class B 
Participation Interest; it is being used to avoid a technical 
liquidation of the Exchange as a result of the closing of the 
Transaction.
---------------------------------------------------------------------------

    At the closing of the Transaction, NASD and the Exchange will 
restructure an existing $50 million loan owed by the Exchange to NASD. 
Under the terms of the arrangement, among other things, the Exchange 
will have the ability to satisfy all obligations under this loan in 
full for $25 million plus accrued interest if it is repaid within the 
first year following the closing of the Transaction. At the closing of 
the Transaction, NASD and the Exchange will enter into a Revolving 
Credit Facility, pursuant to which the Exchange will have the ability 
to borrow from NASD up to a maximum, at any one time, of $25 million.
    Subject to the terms of the Transaction, the agreements relating to 
the 1998 transaction whereby NASD acquired the Class B Participation 
Interest in the Exchange (the ``1998 Transaction''), including the 1998 
Transaction Agreement and the 1998 Technology Transfer Agreement, will 
be terminated and the 1998 Limited Liability Company Agreement of the 
Exchange will be amended.\11\ As the Transaction will effectively 
result in an unwinding of the 1998 Transaction, NASD, the Exchange, and 
MC will enter into certain mutual releases of obligations, including 
those arising under the 1998 Agreements and otherwise related to the 
1998 Transaction.
---------------------------------------------------------------------------

    \11\ See Exchange Act Release No. 40622 (October 30, 1998), 63 
FR 59819 (November 5, 1998) (order approving the 1998 Transaction).
---------------------------------------------------------------------------

    NAHO will pay in full the remaining commitment under the 1998 Seat 
Fund Program to the owners of regular and options principal memberships 
of the Exchange, which is an aggregate of approximately $17.144 million 
(including accrued interest) as of January 31, 2004. Such amount will 
be distributed pro rata to the owners of the Exchange's regular and 
options principal memberships, with each regular and options principal 
membership receiving an equal amount of approximately $20,483, plus 
additional accrued interest on such amount at an annual rate of 5% from 
January 31, 2004 through the closing of the Transaction.
    The existing rights and obligations of the members regarding 
trading through the Exchange will not be affected by the Transaction. 
Trading rights will continue to be owned by MC and represent the right 
to trade through the facilities of the Exchange. In connection with the 
termination of the 1998 Transaction Agreement, the regular and options 
principal members will no longer have the special rights to approve 
material market changes to the Exchange's equity and options businesses 
that were put in place at the time NASD took control of the Exchange. 
However, under the proposed changes, no amendment to the Exchange 
Constitution that would result in a material change in the market 
structure or operations of the Exchange shall be made without first 
obtaining the consent from the Board of Directors of MC. In addition, 
as discussed below, Amex regular and options principal members will 
have the ability to elect the members of the Exchange Board of 
Governors and the MC Board of Directors.

B. LLC Agreement

    The LLC Agreement will, among other things, establish the rights 
and obligations of MC and MC Acquisition Sub as equity owners of Amex 
and vest the Exchange Board with its management powers. The LLC 
Agreement also provides for the indemnification of any person involved 
in an action, suit or proceeding related to such person's affiliation 
with the Exchange if such person acted in good faith and in a manner he 
or she reasonably believed to be in or not opposed to the best 
interests of Amex and, with respect to any criminal action or 
proceeding, had no reasonable cause to believe his or her conduct was 
unlawful.\12\
---------------------------------------------------------------------------

    \12\ See Section 6.3 of the LLC Agreement.
---------------------------------------------------------------------------

C. Corporate Structure and Governance of the Exchange

    The new governance structure for the Exchange will provide for a 
Board of Governors selected by the Exchange's regular and options 
principal members, who also will have the opportunity to vote on a 
``pass-through'' basis on certain significant matters involving the 
Exchange, including the sale, issuance, transfer or other disposition 
of any equity security of the Exchange, or the issuance of any new 
trading rights by the Exchange. The new governance provisions also will 
provide that the Exchange Board of Governors will be largely 
independent and will have board committees composed primarily of 
Independent Governors, as defined below, with substantial authority 
over compensation, audit, regulatory and corporate governance matters, 
as well as the nomination of Governors to serve on the Exchange Board 
of Governors.
1. Board of Governors
    The size of the Exchange's Board of Governors will be reduced from 
eighteen to fifteen Governors. Nine of the Governors will be 
``Independent Governors'' and six of the Governors will be ``Industry 
Governors.'' An Independent Governor will be any person that is: (1) 
Not an officer or employee of, and has no material business 
relationship with, the Exchange and the holders of the Class

[[Page 78488]]

A and Class B Participation Interests; (2) not a director of the 
holders of the Class A or Class B Participation Interest; and (3) not 
(i) a member, lessor or lessee of a membership, (ii) employed by, or 
affiliated or associated with, an entity that (x) is a member, (y) 
otherwise has trading rights or privileges on the Exchange or (z) is a 
broker or dealer, or (iii) a director, officer or employee of an issuer 
of securities that are listed on the Exchange.\13\ In addition, the 
Independent Governors will meet such additional criteria for 
independence or otherwise that are not inconsistent with the criteria 
above as may be established by the Amex Nominating and Corporate 
Governance Committee from time to time.\14\
---------------------------------------------------------------------------

    \13\ See Article II, Section 1(a)(1) of the Exchange 
Constitution.
    \14\ See id.
---------------------------------------------------------------------------

    Of the six Industry Governors of the Exchange, (1) two will be 
persons who spend a substantial portion of their time on the floor of 
the Exchange (the ``Floor Governors''); (2) one will be the owner of a 
regular or options principal membership (the ``Membership Governor''); 
(3) one will be affiliated with a regular or associate member 
organization that engages in a business having substantial direct 
contact with public securities customers (the ``Upstairs Governor''); 
(4) one will be a director, officer, employee or representative of an 
issuer of securities that are listed on the Exchange (the ``Listed 
Company Governor''); and (5) one will be the Exchange's Chief Executive 
Officer (the ``Management Governor'').\15\
---------------------------------------------------------------------------

    \15\ See Article II, Section 1(a) of the Exchange Constitution.
---------------------------------------------------------------------------

    The Chairman of the Exchange Board of Governors may be the 
Management Governor or any Independent Governor. If the Management 
Governor is designated as the Chairman of the Exchange Board of 
Governors, the Board will also designate an Independent Governor as the 
``Lead Governor'' to preside over executive sessions of the Exchange 
Board of Governors (i.e., meetings of the Exchange Board of Governors 
without management or staff of the Exchange). The Management Governor 
will not participate in executive sessions. The Exchange will publicly 
disclose the Lead Governor's name and a means by which interested 
parties may communicate with the Lead Governor. If a Lead Governor has 
been designated by the Exchange Board of Governors, the Lead Governor 
will exercise the powers and discharge the duties of the Chairman in 
calling and presiding at meetings of the Exchange Board of Governors in 
the case of the absence or inability to act of the Chairman.\16\
---------------------------------------------------------------------------

    \16\ See Article II, Section 3 of the Exchange Constitution.
---------------------------------------------------------------------------

    All Governors elected at the annual meeting for the election of 
Governors will serve two-year terms and will hold office until their 
successors are elected. No Governor (other than the Management 
Governor) who has served four consecutive terms as a Governor will be 
eligible for election as a Governor except after an interval of two 
years; provided, however, that service on the Exchange Board of 
Governors prior to January 1, 1999 will not be taken into account for 
these purposes.\17\
---------------------------------------------------------------------------

    \17\ See Article II, Section 1(d) of the Exchange Constitution.
---------------------------------------------------------------------------

    All nominees for election as Governor (as well as for members of 
the Amex Adjudicatory Council (``Council Members''),\18\ and Trustees 
of the Gratuity Fund (``Trustees'')) \19\ will be selected by (i) the 
Amex Nominating and Corporate Governance Committee or (ii) by petition 
of the members to the Amex Nominating and Corporate Governance 
Committee.\20\ The nominees for election as Governors will reflect the 
applicable terms of office and the classifications of Governors as set 
forth above.\21\ The nomination process will be as follows:
---------------------------------------------------------------------------

    \18\ See Article II, Section 7 of the Exchange Constitution for 
a description of the Amex Adjudicatory Council.
    \19\ See Article IX of the Exchange Constitution for a 
description of the Gratuity Fund.
    \20\ See Article III, Sections 1 and 4 of the Exchange 
Constitution.
    \21\ See Section 1.14 of the MC Bylaws.
---------------------------------------------------------------------------

    The members may propose nominees for Governors, Council Members, 
and Trustees to the Amex Nominating and Corporate Governance Committee 
for consideration by written submission filed with the Secretary of the 
Exchange for delivery to the Amex Nominating and Corporate Governance 
Committee not less than 12 weeks prior to the date of the annual 
meeting of the members. In the event that any question is raised as to 
whether any candidate meets the criteria for the appropriate 
classification, such matter shall be determined by the Amex Nominating 
and Corporate Governance Committee, subject to the right of appeal to 
the full Board of Governors.\22\
---------------------------------------------------------------------------

    \22\ See Article III, Section 3 of the Exchange Constitution.
---------------------------------------------------------------------------

    The Amex Nominating and Corporate Governance Committee will then 
report to MC at least eight weeks prior to the date of the annual 
meeting of the members, the names of candidates nominated by it as 
Governors, Council Members, and Trustees. The report of the Amex 
Nominating and Corporate Governance Committee will be promptly 
disseminated or made available to the MC members by posting or other 
appropriate means and will be promptly forwarded to the Secretary of MC 
for mailing to the members in accordance with the MC Bylaws.\23\
---------------------------------------------------------------------------

    \23\ See Article III, Section 2 of the Exchange Constitution.
---------------------------------------------------------------------------

    Members may also nominate candidates for Governors, Council 
Members, and Trustees by written petition filed with the Amex 
Nominating and Corporate Governance Committee within three weeks after 
the dissemination of the report of the Amex Nominating and Corporate 
Governance Committee.\24\ In the event that any question is raised as 
to the validity of the signatures set forth on a petition or whether 
any candidate meets the criteria for the appropriate classification, 
such matter shall be determined by the Amex Nominating and Corporate 
Governance Committee, subject to the right of appeal to the full 
Exchange Board of Governors.\25\ The persons nominated by valid 
petition shall be deemed nominees for the offices and positions set 
forth in such petition and shall be included on the ballot sent to MC 
by the Amex Nominating and Corporate Governance Committee. A statement 
of the candidates nominated by petition will be promptly disseminated 
or made available to the members by posting or other appropriate means 
and will be promptly forwarded to the Secretary of MC for mailing to 
the members in accordance with the MC Bylaws.\26\
---------------------------------------------------------------------------

    \24\ See Article III, Section 4 of the Exchange Constitution.
    \25\ See id.
    \26\ See id. The time periods set forth above may be equitably 
adjusted by the Amex Nominating and Corporate Governance Committee 
with respect to the first election of Governors occurring following 
April 1, 2004, to facilitate a prompt initial election; provided, 
however, in no event shall the petition period described in the 
proceeding paragraph be less than 10 business days. See Article III, 
Section 5 of the Exchange Constitution.
---------------------------------------------------------------------------

    Such nominees will be voted on by the regular and options principal 
members, and will be elected by a plurality of votes cast by these 
members.\27\ Thereafter, MC will vote its

[[Page 78489]]

Class A Participation Interest in the Exchange to elect those 
Governors, Council Members, and Trustees selected by the regular and 
options principal members.\28\
---------------------------------------------------------------------------

    \27\ See Article III, Section 1 of the Exchange Constitution and 
Section 1.11 of the MC Bylaws. See also Section 8 of the MC 
Certificate of Incorporation. Specifically, at each meeting of the 
members for the election of directors of MC, Governors of the 
Exchange, Trustees, and Council Members, such persons shall be 
elected by a plurality of votes cast, in person or by proxy, at such 
meeting by the regular and options principal members voting together 
as a single class and MC, as the holder of the Class A Interest of 
the Exchange, shall vote such Class A Interest so as to cause the 
election of such persons who have been so elected by the regular and 
options principal members.
    \28\ See Section 8 of the MC Certificate of Incorporation and 
Section 1.11 of the MC Bylaws.
---------------------------------------------------------------------------

    The Exchange contemplates a six-month transition period that will 
facilitate a phase-in of the new governance structure of the Exchange. 
Accordingly, immediately following the closing of the Transaction, the 
Board of Governors of the Exchange will form the initial Amex 
Nominating and Corporate Governance Committee, which will select 
nominees for Governor for the first election during the six-month 
transition period. By the end of the six-month transition period, the 
regular and options principal members of the Exchange will have elected 
a new Board of Governors from and among these nominees or any other 
candidates nominated by the members through petition. At the first 
election of the Exchange Board of Governors during the six-month 
transition period, eight of the fifteen Governors will be elected to an 
initial two-year term and the remaining seven Governors will be elected 
to an initial one-year term.\29\ Thereafter, there will be an annual 
meeting for the election of Governors to succeed those Governors whose 
terms have expired.
---------------------------------------------------------------------------

    \29\ The slate of initial eight Governors serving two-year terms 
and the initial Governors serving one-year terms shall consist of 
Independent Governors and Industry Governors in approximately equal 
proportions. The first year of each term will be extended or 
shortened depending upon whether the first election is held before 
or after July 1, 2004. See Article II, Section 1(d) of the Exchange 
Constitution.
---------------------------------------------------------------------------

    The Constitution will require that each Governor, in exercising his 
or her powers and performing his or her duties, comply with the federal 
securities laws and the rules and regulations thereunder, cooperate 
with the Commission pursuant to its regulatory authority, and take into 
consideration the self-regulatory function of the Exchange, and the 
obligations of the Exchange (and his or her obligations) under the Act 
and the rules thereunder, including, without limitation, Section 6(b) 
\30\ of the Act.\31\
---------------------------------------------------------------------------

    \30\ 15 U.S.C. 78f(b).
    \31\ See Article II, Section 3 of the Exchange Constitution and 
Amendment No. 4.
---------------------------------------------------------------------------

2. Standing Committees of the Exchange

    The Exchange Constitution will explicitly provide for a number of 
Standing Committees of the Exchange composed primarily or entirely of 
Independent Governors. Specifically, the Exchange Constitution will 
provide for: (i) A Nominating and Corporate Governance Committee; (ii) 
an Executive Committee; (iii) an Audit Committee; (iv) a Regulatory 
Oversight Committee; and (v) a Compensation Committee.\32\ Any power 
that has been delegated to any such Standing Committee may not be 
delegated to any other committee formed by the Exchange Board of 
Governors.\33\
---------------------------------------------------------------------------

    \32\ See Article II, Section 6 of the Exchange Constitution.
    \33\ To establish the Standing Committees as described herein 
and facilitate the transition, Industry Governors may serve as 
members of the Standing Committees until the earlier of (i) the six-
month anniversary of the closing of the acquisition by MC (or MC 
Acquisition Sub) of the Class Participation B Interest (the ``Class 
B Interest Acquisition Closing Date'') or (ii) the date of the 
election of the Board of Governors first succeeding the Class B 
Interest Acquisition Closing Date. See Article II, Section 1(f) of 
the Exchange Constitution.
---------------------------------------------------------------------------

(i) Amex Nominating and Corporate Governance Committee
    The Amex Nominating and Corporate Governance Committee will be 
appointed by the Exchange Board of Governors and will consist of three 
Governors, two of whom shall be Independent Governors and one of whom 
shall be the Membership Governor, as established by resolution adopted 
by a majority of the Board of Governors then in office.\34\ Any vacancy 
in the Amex Nominating and Corporate Governance Committee will be 
filled by the Committee's remaining members, who will elect a Governor 
qualified to fill the vacancy.
---------------------------------------------------------------------------

    \34\ See Article II, Section 6(a) of the Exchange Constitution. 
The NASD Nominating Committee will cease to exist upon the closing 
of the Transaction.
---------------------------------------------------------------------------

    The Amex Nominating and Corporate Governance Committee will, among 
other things: (i) Establish criteria and procedures for the nomination 
of Governors, Council Members, and Trustees; (ii) review the 
qualifications of and, when necessary and appropriate, interview 
candidates who may be proposed for nomination as, Governors, Council 
Members, and Trustees; (iii) submit to MC, in its capacity as the Class 
A Interestholder, a slate of nominees for the election of Governors, 
Council Members, and Trustees; (iv) monitor and consider the Exchange's 
corporate governance practices; (v) consider and make recommendations 
concerning the composition, organization, and functions of the Exchange 
Board of Governors; (vi) review periodically the performance of the 
Exchange Board of Governors; (vii) review periodically the Exchange 
Constitution; (viii) make periodic reports to the entire Exchange Board 
of Governors on such matters within its powers and responsibilities as 
the Exchange Board of Governors may specify; and (ix) perform such 
other duties in connection with the selection or election of the 
Governors, Council Members, and Trustees or other corporate governance 
matters as the Exchange Board of Governors may request.
(ii) Executive Committee
    The Executive Committee will be appointed by the Exchange Board of 
Governors, upon the recommendation of the Amex Nominating and Corporate 
Governance Committee, and will consist of three to five Governors, at 
least a majority of whom will be Independent Governors and at least one 
of whom shall be an Industry Governor. The Executive Committee will 
have reasonable access during normal working hours to all information 
(including all books and records) respecting the Exchange and its 
assets. The Executive Committee, to the extent permitted by law, will 
have and may exercise, when the Exchange Board of Governors is not in 
session, all powers of the Exchange Board of Governors regarding the 
supervision of the management of the business and affairs of the 
Exchange.
(iii) Audit Committee
    The Audit Committee will be appointed by the Exchange Board of 
Governors, upon the recommendation of the Amex Nominating and Corporate 
Governance Committee, and will consist of three to five Independent 
Governors. The Audit Committee will: (i) Have the authority to consider 
the qualification of the Exchange's independent public accountants, 
make recommendations to the Exchange Board of Governors as to their 
selection and retention, and review and resolve disputes between such 
independent public accountants and management relating to the 
preparation of the annual financial statements; (ii) confer with the 
Exchange's independent public accountants to determine the scope of the 
audit that such accountants will perform; (iii) receive reports from 
the independent public accountants and transmit such reports to the 
Exchange Board of Governors, and after the close of the fiscal year, 
transmit to the Exchange Board of Governors the financial statements 
certified by such accountants; (iv) inquire into, examine and make 
comments on the accounting procedures of the Exchange and the reports 
of the independent public accountants; (v) consider and make 
recommendations to the Exchange Board of Governors upon matters

[[Page 78490]]

presented to it by the officers of the Exchange pertaining to the audit 
practices and procedures adhered to by the Exchange; (vi) appoint the 
internal auditors of the Exchange; and (vii) make periodic reports to 
the entire Exchange Board of Governors on such matters within its 
powers and responsibilities as the Exchange Board of Governors may 
specify.
    The internal auditors of the Exchange will report directly to the 
Audit Committee, and to the extent that such internal auditors are 
officers or employees of the Exchange, also to the Chief Executive 
Officer (or the Chief Executive Officer's Designee).\35\ The internal 
auditors shall not be terminated without the advice and consent of the 
Audit Committee.
---------------------------------------------------------------------------

    \35\ According to the Exchange, it is expected that, after the 
closing of the Transaction, the NASD will continue to provide the 
internal audit function services pursuant to a transition services 
agreement with the Exchange. Consequently, the internal auditors 
will not initially be the officers or employees of the Exchange.
---------------------------------------------------------------------------

(iv) Regulatory Oversight Committee
    The Regulatory Oversight Committee will be appointed by the 
Exchange Board of Governors, upon the recommendation of the Amex 
Nominating and Corporate Governance Committee, and will consist of 
three to five Independent Governors and one Industry Governor. The 
Independent Governors serving as members of the Regulatory Oversight 
Committee will be the only voting members of the committee. The 
Industry Governor serving as a member of the Regulatory Oversight 
Committee will be a non-voting member.
    The Regulatory Oversight Committee will: (i) Have authority to 
determine the Exchange's regulatory scheme, programs, budget and 
staffing proposals annually; (ii) appoint and direct the Chief 
Regulatory Officer; (iii) advise the Compensation Committee with 
respect to and approve the compensation (or any change thereto) of the 
Chief Regulatory Officer; (iv) be responsible for assessing regulatory 
performance on a regular basis; (v) have the authority to recommend the 
adoption of rules to the Exchange Board of Governors concerning such 
matters as may be specified in the Regulatory Oversight Committee's 
charter; and (vi) make periodic reports to the entire Exchange Board of 
Governors on such matters within its powers and responsibilities as the 
Exchange Board of Governors may specify.
    Upon consummation of the Transaction, the Chief Regulatory Officer 
will report directly to the Regulatory Oversight Committee.\36\ The 
Exchange Board of Governors will have the power to remove the Chief 
Regulatory Officer only with the advice and consent of the Regulatory 
Oversight Committee.
---------------------------------------------------------------------------

    \36\ In Amendment No. 6, Amex revised Section 4(a) and Section 
4(d) of Article II of the Amex Constitution to provide that the 
Chief Regulatory Officer would only report to the Regulatory 
Oversight Committee, and not to the Chief Executive Officer (or his 
designee).
---------------------------------------------------------------------------

(v) Compensation Committee
    The Compensation Committee will be appointed by the Exchange Board 
of Governors, upon the recommendation of the Amex Nominating and 
Corporate Governance Committee, and will consist of three to five 
Independent Governors. The Compensation Committee will have and may 
exercise all of the authority of the Exchange Board of Governors in 
administering the Exchange's management compensation plans, and will be 
responsible for, among other things: (i) Reviewing and approving 
performance goals relevant to the compensation of the Chief Executive 
Officer and evaluating the Chief Executive Officer's performance in 
achieving such goals, and recommending the compensation of the Chief 
Executive Officer to the Exchange Board of Governors; (ii) recommending 
to the Exchange Board of Governors the compensation of executive 
officers of the Exchange; (iii) causing to be publicly disclosed on an 
annual basis the compensation (and methodology behind such 
compensation) of the Governors and the five most highly compensated 
officers of the Exchange; and (iv) making periodic reports to the 
entire Exchange Board of Governors on such matters within its powers 
and responsibilities as the Exchange Board of Governors may specify.
3. Other Committees
    In addition to the Standing Committees, the Exchange Board of 
Governors by the affirmative vote of a majority of the entire Exchange 
Board of Governors may delegate such of its powers as it may from time 
to time determine, subject to the provisions of the Constitution and 
applicable law, to such committee or committees as the Exchange Board 
of Governors may from time to time authorize; provided, however, no 
such delegation may be made of any power described in the Exchange 
Constitution provisions concerning the responsibilities of the Amex 
Nominating and Corporate Governance Committee, the Executive Committee, 
the Audit Committee, the Regulatory Oversight Committee, and the 
Compensation Committee.\37\ Consistent with the foregoing, the Exchange 
Board of Governors may assign such authority and duties to the Chief 
Executive Officer and to other officers and employees of the Exchange 
in addition to those specified in the Constitution, as the Exchange 
Board of Governors may from time to time determine, subject to 
applicable law and the provisions of the Exchange Constitution.\38\
---------------------------------------------------------------------------

    \37\ See Article II, Section 3 of the Exchange Constitution.
    \38\ See id.
---------------------------------------------------------------------------

    Under the Exchange Constitution, the Exchange Board of Governors 
will create and consult with the Seat Owners Advisory Committee 
(``SOAC''), consisting of representatives of various constituencies of 
the Exchange as SOAC shall deem appropriate.\39\
---------------------------------------------------------------------------

    \39\ See id.
---------------------------------------------------------------------------

4. Management
    The officers of the Exchange shall include a Chief Executive 
Officer, Treasurer, Secretary, and Chief Regulatory Officer, and such 
other officers as the Chief Executive Officer, subject to the approval 
of the Exchange Board of Governors, may appoint.\40\
---------------------------------------------------------------------------

    \40\ See Article II, Section 4 of the Exchange Constitution.
---------------------------------------------------------------------------

(i) Chief Executive Officer
    The Chief Executive Officer will be selected by a majority of the 
Governors then in office. During his incumbency, the Chief Executive 
Officer shall have no affiliation with any member organization, or any 
other business interest proscribed by the Code of Conduct of the 
Exchange. The Chief Executive Officer shall be responsible to the Board 
of Governors of the Exchange for the management and administration of 
the affairs of the Exchange,\41\ and will be a member of the Board of 
Governors. The Chief Executive Officer shall have such other powers and 
duties in the management of the Exchange as may be determined from time 
to time by the Exchange Board of Governors.
---------------------------------------------------------------------------

    \41\ The Chief Executive Officer, or such other officer as he 
may designate, shall prepare and present to the Board of Governors 
periodic reports concerning the finances, income and expenses of the 
Exchange, and prior to the beginning of each fiscal year of the 
Exchange shall present to the Board of Governors an estimate of the 
income of the Exchange and recommendations as to appropriations for 
expenses for such fiscal year. The Chief Executive Officer may at 
any time recommend additional appropriations or the increase or 
decrease of any appropriations made by the Board of Governors and 
shall make reports and recommendations to the Board of Governors as 
to the financial policy of the Exchange. See Article II, Section 
4(a) of the Exchange Constitution.
---------------------------------------------------------------------------

    All salaried officers and employees of the Exchange shall be under 
the

[[Page 78491]]

direction of and responsible to the Chief Executive Officer or the 
Chief Executive Officer's designee; provided, however, that the Chief 
Regulatory Officer shall report only to the Regulatory Oversight 
Committee and the internal auditors also shall report directly to the 
Audit Committee.\42\
---------------------------------------------------------------------------

    \42\ See Article II, Section 4(d) and Article II, Section 6(c) 
of the Exchange Constitution.
---------------------------------------------------------------------------

    In the case of the absence or inability to act of the Chief 
Executive Officer, such other person as the Board of Governors may 
designate shall assume all the functions and discharge all the duties 
of the Chief Executive Officer. In the absence of such designation by 
the Board of Governors, the most senior ranking officer available shall 
assume all such functions and discharge all such duties of the Chief 
Executive Officer. In case a vacancy shall occur in the office of Chief 
Executive Officer, the Board of Governors, by the affirmative vote of a 
majority of the Governors then in office, shall fill such vacancy.
(ii) Chief Regulatory Officer
    The Chief Regulatory Officer will be responsible for the management 
and administration of the regulatory functions of the Exchange and will 
be appointed by the Regulatory Oversight Committee.\43\ The Chief 
Regulatory Officer will report directly to the Regulatory Oversight 
Committee. The Exchange Board of Governors will have the power to 
remove the Chief Regulatory Officer only with the advice and consent of 
the Regulatory Oversight Committee.
---------------------------------------------------------------------------

    \43\ See supra discussion under Section II.C.2(iv) ``Regulatory 
Oversight Committee.''
---------------------------------------------------------------------------

(iii) Other Officers
    Subject to approval by the affirmative vote of a majority of the 
entire Board of Governors, the Chief Executive Officer may appoint such 
other officers of the Exchange, including, but not limited to, a 
President, Executive Vice President, Senior Vice President, and Vice 
President, as he may from time to time determine are required for the 
efficient management and operation of the Exchange, and subject to 
approval of a majority of the Board of Governors he shall appoint the 
Treasurer and the Secretary. The Chief Executive Officer shall fix the 
duties, responsibilities, terms and conditions of employment of 
officers and employees of the Exchange, other than those appointments 
or terms and conditions of employment that are within the power and 
responsibility of the Compensation Committee, the Regulatory Oversight 
Committee or the Audit Committee.

D. Matters Requiring Consent of MC or the Exchange Members \44\

    The Exchange Constitution will prohibit the Exchange, without MC's 
consent, from (i) selling, issuing, transferring or otherwise disposing 
of any limited liability company interest or other equity security of 
the Exchange or any notes or debt securities of the Exchange containing 
equity features, (ii) issuing any new trading privileges or material 
new rights to holders of existing privileges, or (iii) issuing 
additional memberships. \45\ Any consent of MC requested by the 
Exchange to take such actions will only be granted by MC upon the 
affirmative vote of a majority of the regular memberships and the 
options principal memberships (voted as a single class) at a meeting 
duly called and convened and at which a quorum is present.\46\ In 
addition, without the affirmative vote of a majority of regular and 
options principal members, neither MC nor any affiliate of MC, 
including MC Acquisition Sub, may sell, issue, transfer or otherwise 
dispose of any equity security of the Exchange or any notes or debt 
securities of the Exchange containing equity features.\47\
---------------------------------------------------------------------------

    \44\ See Article II, Section 8, Article IV, Section 1(j), and 
Article XIII, Section 1 of the Exchange Constitution and Sections 7, 
8 and 9 of the MC Certificate of Incorporation.
    \45\ See Article II, Section 8 and Article IV, Section 1(j) of 
the Exchange Constitution.
    \46\ See Sections 7(a) and 9 of the MC Certificate of 
Incorporation. Upon receiving a written request from the Exchange 
for an amendment to the MC Certificate of Incorporation to authorize 
the issuance of additional memberships of any class, the Secretary 
of MC shall call a meeting of the holders of memberships entitled to 
vote thereat to vote on such request in accordance with the MC 
Bylaws. Such an amendment may be authorized, and such additional 
memberships may be issued, only upon the affirmative vote of a 
majority of the regular memberships and the options principal 
memberships voted (as a single class) at a duly convened meeting.
    \47\ See Section 7(b) of the MC Certificate of Incorporation. 
Under the proposal, unless otherwise required by statute, by the MC 
Certificate of Incorporation, or by the MC Bylaws, all matters 
submitted to a vote of the MC members shall be decided by the vote 
of a majority of the Members entitled to vote and present in person 
or by proxy at the meeting. See Sections 1.10 and 1.11 of the MC 
Bylaws.
---------------------------------------------------------------------------

    The Exchange Constitution will also provide that certain of its 
provisions may not be amended without the consent of the Board of 
Directors of MC. The provisions requiring consent from the board of MC 
to amend are:
     Article II, Section 1 (Classification of the Exchange 
Board of Governors);
     Article II, Section 6 (Standing Committees);
     Article III (Nomination and Election Procedures);
     Article XIII, Sections 1 and 3 (Procedure, Adoption of 
Amendments Requiring the Consent of MC); and
     Any amendment to the Constitution that would result in a 
material change in the market structure or operations of the Exchange.
    Other than the provisions above, the provisions of the Exchange 
Constitution may be amended or repealed, and new provisions may be 
adopted, only if approved by a majority of Governors then in office in 
accordance with the procedure as specified in Article XIII of the 
Exchange Constitution.

E. Amex Adjudicatory Council

    The Amex Adjudicatory Council has the authority to act for the 
Board of Governors with respect to any appeal or review of a 
disciplinary hearing, a statutory disqualification proceeding, or a 
membership proceeding; any review of a written stipulation of facts and 
consent to penalty; the exercise of any exemptive authority; and such 
other proceedings or actions authorized by the rules of the 
Exchange.\48\ The Amex Adjudicatory Council shall consist of six 
individuals, three of whom shall be Industry Governors (``Industry 
Council Members''), and three of whom shall be Independent Governors 
(``Independent Council Members'').\49\ All Council Members shall be 
nominated and elected in accordance with the procedures as described in 
Section II.C.1 (``Board of Governors'') above.
---------------------------------------------------------------------------

    \48\ See Article II, Section 7(a) of the Exchange Constitution. 
The Amex Board of Governors has a discretionary right of review over 
matters within the purview of the Amex Adjudicatory Council.
    \49\ See Article II, Section 7(b) of the Exchange Constitution. 
Under the current Exchange Constitution, the Amex Adjudicatory 
Council consists of three floor governors (who spend a substantial 
part of their time on the floor of the Exchange) and three public 
governors (who are the representatives of the public (i) none of 
whom is, or is affiliated with, a broker or dealer in securities and 
(ii) all of them are nominated by the NASD Nominating Committee).
---------------------------------------------------------------------------

    In the event that a Council Member is precluded from participating 
in the Council's consideration of a particular matter due to a conflict 
of interest, the Board of Governors shall appoint a Governor within the 
same classification for the position to serve as a substitute for such 
Council Member with respect to the particular matter. In the event that 
a Governor fitting the relevant classification is not available to 
serve as a substitute, the Board of Governors may appoint a person who 
would be qualified to serve as a Governor within such classification 
(Industry Governor or Independent Governor). If a position on the Amex 
Adjudicatory Council becomes vacant, whether because of

[[Page 78492]]

death, disability, disqualification, removal or resignation, the Board 
of Governors shall appoint a Governor within the same classification 
(Industry or Independent Council Member) to fill the vacancy until the 
next annual election of such Council members.\50\
---------------------------------------------------------------------------

    \50\ Under the current Exchange Constitution, the Board of 
Directors of MC was authorized to fill such vacancies.
---------------------------------------------------------------------------

F. Amendments to the Exchange Constitution and the Exchange LLC 
Agreement

    The Amex Board would continue to be permitted to amend provisions 
of the Exchange Constitution by the affirmative vote of a majority of 
the entire Board, although, as noted above, the consent of MC's Board 
of Directors is needed to amend certain specified provisions of the 
Exchange Constitution.\51\
---------------------------------------------------------------------------

    \51\ See Exchange Constitution Article XIII, Section 1.
---------------------------------------------------------------------------

    Any amendment to or repeal of any provision of the LLC Agreement 
shall not be effective until the same is filed with or filed with and 
approved by the Commission, under Section 19 of the Act \52\ and the 
rules promulgated thereunder, as the case may be.\53\
---------------------------------------------------------------------------

    \52\ 15 U.S.C. 78s.
    \53\ See Section 11.3 of the LLC Agreement.
---------------------------------------------------------------------------

G. Amex Ownership and Control

    Any sale, issuance, transfer or other disposition in any single 
transaction or series of transactions of (A) any limited liability 
company interests or other equity security of the Exchange or any 
securities convertible into or exchangeable for, or options rights or 
warrants to acquire, any such equity securities or (B) any notes or 
debt securities containing equity features (including, without 
limitation, any notes or debt securities convertible into or 
exchangeable for any equity securities or containing profit 
participation features) shall: (i) Be made only in compliance with 
Sections 7(a) and 7(b) of the MC Certificate of Incorporation; \54\ and 
(ii) be subject to prior approval by the Commission pursuant to the 
rule filing procedure under Section 19 of the Act,\55\ and the rules 
promulgated thereunder.\56\ Any attempt to issue or transfer any such 
equity interests or any rights thereunder in violation of these 
provisions shall be null and void ab initio.\57\
---------------------------------------------------------------------------

    \54\ Section 7(a) of the MC Certificate of Incorporation 
requires that the Exchange obtain the consent of MC in order to 
effect such sale, issuance, transfer or other disposition. MC, in 
turn, must obtain the approval of the regular and options principal 
members to grant such consent. Specifically, a majority of the 
regular and options principal members must approve any such sale, 
issuance, transfer of other disposition (voting as a single class). 
Section 7(b) of the MC Certificate of Incorporation provides that MC 
will be required to obtain the consent of the majority of the 
memberships entitled to vote in order for MC or an affiliate to 
transfer, sell or otherwise dispose of its or the affiliate's 
interest in the Exchange. If a proposed sale, issuance, transfer or 
other disposition of interest in the Exchange is not approved at the 
duly convened meeting convened with respect thereto, the request for 
such matter shall not be submitted again to the membership for a 
period of ninety days. See Sections 7(a) and 7(b) of the MC 
Certificate of Incorporation.
    \55\ 15 U.S.C. 78s.
    \56\ See Section 9.3 of the LLC Agreement.
    \57\ Id.
---------------------------------------------------------------------------

    In addition, any sale, issuance, transfer or other disposition in 
any single transaction or series of transactions of (A) any equity 
securities of MC or MC Acquisition Sub, or any securities convertible 
into or exchangeable for, or options rights or warrants to acquire, any 
such equity securities, or (B) any notes or debt securities containing 
equity features (including, without limitation, any notes or debt 
securities convertible into or exchangeable for any equity securities 
or containing profit participation features) shall be subject to prior 
approval by the Commission pursuant to the rule filing procedure under 
Section 19 of the Act \58\ and the rules promulgated thereunder; 
provided that the foregoing shall not apply to any sale, transfer or 
other disposition of seats or membership interests of the MC.\59\ Any 
attempt to issue or transfer such equity interest or any rights 
thereunder in violation of these requirements shall be null and void ab 
initio.\60\
---------------------------------------------------------------------------

    \58\ 15 U.S.C. 78s.
    \59\ See Section 7(c) of the MC Certificate of Incorporation.
    \60\ Id.
---------------------------------------------------------------------------

H. Corporate Governance and Structure of MC

    As detailed above, after the closing of the Transaction, MC will 
own 100% of the equity interests in the Exchange, and MC will continue 
to be a membership organization of which the members are the regular 
and options principal members of Amex. The MC Board of Directors will 
be elected by the members of MC and will consist of five persons who do 
not necessarily serve on the Exchange Board of Governors.\61\
---------------------------------------------------------------------------

    \61\ Under the MC Certificate of Incorporation, the purposes of 
MC continue to be: (i) Directly or indirectly holding, acquiring, 
exchanging, or disposing of equity or other interests in the 
Exchange and exercising the rights incident to its ownership; and 
(ii) to conduct and carry on only activities incidental to and in 
furtherance of the foregoing which may lawfully be conducted and 
carried on by a corporation of its type formed under the New York 
Not-for-Profit Corporation Law. See Section 3 of the MC Certificate 
of Incorporation.
---------------------------------------------------------------------------

1. Board of Directors
    The MC Board of Directors will consist of five directors elected by 
the members of MC in accordance with the MC Bylaws. The MC Board of 
Directors will be elected for one-year terms and will hold office until 
their successors are elected. No director of MC who has served eight 
consecutive elected terms as a director will be eligible for election 
as a director of MC except after an interval of two years; provided, 
however, that service on the Board of Directors prior to January 1, 
1999 will not be taken into account for these purposes.\62\ Unless 
otherwise required, each matter shall be decided by a vote of a 
majority of the directors present at the time of the vote, provided a 
quorum is present.\63\ Vacancies on the MC Board of Directors may be 
filled for the remaining term of such vacant position by a majority 
vote of all remaining MC directors.\64\ The MC Bylaws will also provide 
limitation of liability and indemnification for MC directors and 
officers.\65\
---------------------------------------------------------------------------

    \62\ See Section 2.03 of the MC Bylaws.
    \63\ See Section 2.13 of the MC Bylaws.
    \64\ See Section 2.06 of the MC Bylaws.
    \65\ See Article VIII of the MC Bylaws.
---------------------------------------------------------------------------

    Under the MC Bylaws, all nominees for election as directors \66\ 
will be selected by either (i) the MC Nominating Committee or (ii) by 
petition of the members of MC to the MC Nominating Committee.\67\ The 
process is as follows:
---------------------------------------------------------------------------

    \66\ The MC Bylaws also includes the nomination procedures for 
Exchange Governors, Council Members, and Trustees of the Exchange, 
as described above in Section II.C.1 (``Board of Governors'').
    \67\ See Sections 1.13 of the MC Bylaws. Any person nominated by 
the MC Nominating Committee or by petition, whether or not such 
person is a Member, may be eligible to be elected to the MC Board of 
Directors.
---------------------------------------------------------------------------

    The members of MC may propose nominees for directors of MC for 
consideration by the MC Nominating Committee by written submission 
filed with the Secretary of MC for delivery to the MC Nominating 
Committee not less than 12 weeks prior to the annual meeting of the 
members of MC. The eligibility of any candidate proposed in any such 
submission will be determined by the MC Nominating Committee in its 
sole discretion and without the right of appeal.
    The MC Nominating Committee then will report to MC at least eight 
weeks prior to the date of the annual meeting of the members the names 
of candidates nominated by it as directors. Such report will be 
promptly disseminated or made available to members of MC by posting or 
other appropriate means and will be promptly forwarded to the

[[Page 78493]]

Secretary of MC for mailing to the members in accordance with the MC 
Bylaws.
    The members of MC also may nominate candidates for directors of MC 
by written petition filed with the Secretary of MC for delivery to the 
MC Nominating Committee within three weeks after the dissemination of 
the report of the MC Nominating Committee. The eligibility of any 
candidate nominated in any such petition will be determined by the MC 
Nominating Committee. A statement of the candidates nominated by 
petition will be promptly disseminated or made available to members of 
MC by posting or other appropriate means and will be promptly forwarded 
to the Secretary of MC for mailing to the members within three days 
after the dissemination in accordance with the MC Bylaws.\68\
---------------------------------------------------------------------------

    \68\ The time periods set forth above may be equitably adjusted 
by the MC Nominating Committee with respect to the first election of 
directors occurring following Apri1 1, 2004, to facilitate a prompt 
initial election; provided, however, in no event shall the petition 
period described in the proceeding paragraph be less than 10 
business days. See Section 1.13(g) of the MC Bylaws.
---------------------------------------------------------------------------

2. MC Nominating Committee
    Under the MC Bylaws, the MC Nominating Committee will be appointed 
by the MC Board of Directors and will consist of two or three 
directors.\69\ Any vacancy in the MC Nominating Committee will be 
filled by the Committee's remaining members, who will elect a person 
qualified to fill the vacancy.\70\
---------------------------------------------------------------------------

    \69\ See Section 3.03(a) of the MC Bylaws.
    \70\ See Section 3.03(b) of the MC Bylaws.
---------------------------------------------------------------------------

    The MC Nominating Committee will: (i) Establish criteria and 
procedures for the nomination of MC directors; (ii) search for 
qualified nominees for submission to the members of MC for election; 
(iii) review the qualifications of and, when necessary and appropriate, 
interview candidates who may be proposed, or who are nominated by 
petition, as MC directors; (iv) submit to the members of MC a slate of 
nominees for the election of MC directors; (v) perform any and all 
other duties in connection with the selection, election, or termination 
of the MC directors as the MC Board of Directors may request; and (vi) 
make periodic reports to the entire Board of Directors on such matters 
within the Committee's powers and responsibilities as the Board of 
Directors may specify.\71\
---------------------------------------------------------------------------

    \71\ See Section 3.03(a) of the MC Bylaws.
---------------------------------------------------------------------------

I. Confidential Information and Books and Records

    All books and records of the Exchange shall be kept in the United 
States.\72\ All confidential information of the Exchange pertaining to 
the self-regulatory function of the Exchange, including all books and 
records of the Exchange reflecting such confidential information 
(including but not limited to regulatory investigations, examinations, 
disciplinary matters, and to the extent designated by the Exchange as 
confidential, trading data and trading practices) will be retained in 
confidence by each Governor, the Exchange and its personnel, and will 
not be used by each Governor, the Exchange and its personnel for any 
non-regulatory purposes and shall not be made available to any person 
(including, without limitation, any members of the Exchange) except 
that such confidential information may be disclosed: (i) To those 
personnel of the Exchange and to members of the Board of Governors of 
the Exchange to the extent necessary or appropriate to properly 
discharge the self-regulatory responsibilities of the Exchange; (ii) to 
the extent required by applicable statute, rule or regulation or any 
court of competent jurisdiction; and (iii) to the extent that such 
confidential information has become generally available publicly 
through no fault of the Exchange or its Governors, officers, employees 
or advisors.\73\
---------------------------------------------------------------------------

    \72\ See Section 2.1 of the LLC Agreement. Likewise, all books 
and records of MC must be maintained in the United States. See 
Section 6.02 of the MC Bylaws.
    \73\ See Article II, Section 3 of the Exchange Constitution. In 
addition, this provision of the Constitution provides that 
confidential information of the Exchange shall be subject at all 
times to inspection and copying by the Commission, and that nothing 
in the Constitution should be interpreted as to limit or impede the 
rights of the Commission to access and examine such confidential 
information of the Exchange pursuant to the U.S. federal securities 
laws and the rules thereunder, or to limit or impede the ability of 
a Governor, the Exchange and its personnel to disclose such 
confidential information to the Commission.
---------------------------------------------------------------------------

    Also, all confidential information of Amex pertaining to the self-
regulatory function of Amex, including books, minutes and records of 
Amex reflecting such confidential information (including but not 
limited to regulatory investigations, examinations, disciplinary 
matters, and to the extent designated by Amex as confidential, trading 
data and practices) which shall come into the possession of MC, the 
officers, directors, employees or agents of MC, shall be retained in 
confidence by MC and the officers, directors, employees and agents of 
MC and shall not be used for any non-regulatory purposes.\74\ MC shall 
take reasonable steps to ensure that its agents will comply with this 
provision.\75\
---------------------------------------------------------------------------

    \74\ See Section 16 of the MC Certificate of Incorporation and 
Section 7.08 of the MC Bylaws. Nothing in the MC Certificate of 
Incorporation or MC Bylaws shall be interpreted as to limit or 
impede the rights of the Commission or Exchange to access and 
examine such confidential information of the Exchange pursuant to 
the U.S. federal securities laws and the rules thereunder, or to 
limit or impede the ability of a Governor, the Exchange and its 
personnel to disclose such confidential information to the 
Commission.
    \75\ See id.
---------------------------------------------------------------------------

    MC shall keep at the office of MC or such other locations within 
the United States as may from time to time be designated by its Board 
of Directors correct and complete books and records of account and 
minutes of the proceedings of its members, Board of Directors and 
committees, if any, and a list of the names, addresses, and classes of 
membership of the members.\76\ To the extent that the foregoing books, 
minutes and records are related to the activities of the Exchange, such 
books, minutes and records shall be deemed to be the books, minutes and 
records of the Exchange for the purposes of Section 17(b) of the 
Act,\77\ and shall be subject at all times to inspection and copying by 
the Commission and the Exchange.\78\
---------------------------------------------------------------------------

    \76\ See Section 12 of the MC Certificate of Incorporation and 
Section 6.02 of the MC Bylaws.
    \77\ 15 U.S.C. 78q(b).
    \78\ See Section 12 of the MC Certificate of Incorporation and 
Section 6.02 of the MC Bylaws.
---------------------------------------------------------------------------

J. Commission and Amex Jurisdiction

    For so long as MC shall control, directly or indirectly, the 
Exchange, MC shall, and its officers, directors and employees by virtue 
of their acceptance of such position shall be deemed to, irrevocably 
submit to the exclusive jurisdiction of the United States federal 
courts, the Commission, and the Exchange, for the purposes of any suit, 
action or proceeding pursuant to the United States federal securities 
laws, and the rules or regulations thereunder, arising out of, or 
relating to the activities of the Exchange, and MC shall, and by virtue 
of their acceptance of any such position, the officers, directors and 
employees of MC shall be deemed to, waive and agree not to assert by 
way of motion, as a defense or otherwise in any such suit, action or 
proceeding, any claims that it or they are not personally subject to 
the jurisdiction of the Commission as to such matters, that the suit, 
action or proceeding is an inconvenient forum or that the venue of the 
suit, action or proceeding is improper, or that the subject matter

[[Page 78494]]

thereof may not be enforced in or by such courts or agency.\79\
---------------------------------------------------------------------------

    \79\ See Section 14 of the MC Certificate of Incorporation and 
Section 7.06 of the MC Bylaws.
---------------------------------------------------------------------------

    With respect to conduct by the officers and directors of MC that 
relates to the activities of the Exchange, such officers and directors 
shall be deemed to be the officers and directors of the Exchange solely 
for the purposes of the removal and censure authority of the Commission 
pursuant to Section 19(h)(4) of the Act.\80\
---------------------------------------------------------------------------

    \80\ 15 U.S.C. 78s(h)(4). See Section 13 of the MC Certificate 
of Incorporation and Section 7.05 of the MC Bylaws.
---------------------------------------------------------------------------

K. Cooperation With the Commission

    For so long as MC shall control, directly or indirectly, the 
Exchange, MC shall, and the officers, directors and employees of MC by 
virtue of their acceptance of such position shall be deemed to, agree 
to cooperate with the Commission and the Exchange, in respect of the 
Commission's oversight responsibilities regarding the Exchange and the 
self-regulatory functions and responsibilities of the Exchange.\81\ MC 
shall take reasonable steps to ensure that its agents similarly 
cooperate with the Commission.\82\
---------------------------------------------------------------------------

    \81\ See Section 15 of the MC Certificate of Incorporation and 
Section 7.07 of the MC Bylaws.
    \82\ See id.
---------------------------------------------------------------------------

L. Additional Responsibilities of MC Officers and Directors

    For so long as MC shall control, directly or indirectly, the 
Exchange, each officer, director and employee of MC shall give due 
regard to the preservation of the independence of the self-regulatory 
function of the Exchange and to the Exchange's obligations under the 
Act, and the rules thereunder, including, without limitation, Section 
6(b) of the Act,\83\ and shall not take any actions which he or she 
knows or reasonably should have known would interfere with the 
effectuation of any decisions by the Exchange Board of Governors 
relating to its regulatory functions (including disciplinary matters) 
or which would adversely affect the ability of the Exchange to carry 
out its responsibilities under the Act.\84\
---------------------------------------------------------------------------

    \83\ 15 U.S.C. 78f(b).
    \84\ See Section 13 of the MC Certificate of Incorporation and 
Section 7.05 of the MC Bylaws.
---------------------------------------------------------------------------

M. Further Compliance

    MC shall take reasonable steps to ensure that its officers, 
directors, and employees comply with Sections 12 (Books and Records), 
13 (Officers and Directors), 14 (Consent to Jurisdiction), 15 
(Cooperation with the Commission) and 16 (Confidential Information) of 
the MC Certificate of Incorporation, and Sections 6.02 (Books and 
Records), 7.05 (Officers and Directors), 7.06 (Consent to 
Jurisdiction), 7.07 (Cooperation with the Commission) and 7.08 
(Confidential Information) of the MC Bylaws, which shall include 
obtaining a written agreement from such individuals, as a condition to 
their initial or continued employment or service as a director, that 
they will comply with or consent to, as the case may be, such 
provisions.\85\
---------------------------------------------------------------------------

    \85\ See Section 17 of the MC Certificate of Incorporation and 
Section 7.09 of the MC Bylaws.
---------------------------------------------------------------------------

N. Amendments to the MC Certificate of Incorporation and MC Bylaws

    Under the MC Certificate of Incorporation and the MC Bylaws, for so 
long as MC controls, directly or indirectly, the Exchange, before any 
change or addition to the MC Certificate of Incorporation or MC Bylaws 
shall be effective, the same shall be submitted to the Exchange Board 
of Governors, and if the Board shall determine that the same 
constitutes a ``rule of an exchange'' as such term is defined in the 
Act and the rules promulgated thereunder,\86\ and must be filed with or 
filed with and approved by the Commission before the same may be 
effective, under Section 19 of the Act,\87\ and the rules promulgated 
thereunder, then the same shall not be effective until filed with or 
filed with and approved by the Commission, as the case may be.\88\
---------------------------------------------------------------------------

    \86\ See infra note 140.
    \87\ 15 U.S.C. 78s.
    \88\ See Section 18 of the MC Certificate of Incorporation and 
Section 9.01 of the MC Bylaws.
---------------------------------------------------------------------------

O. Limitation on Distributions

    The LLC Agreement will provide that no distribution to MC and MC 
Acquisition Sub, as participants of the Exchange, shall include 
revenues received by the Exchange from regulatory fines, fees or 
penalties.\89\ Amex states that the purpose of this provision is to 
ensure that the regulatory authority of the Exchange is not used 
improperly to benefit the holders of the Exchange's LLC interests.
---------------------------------------------------------------------------

    \89\ See Section 4.6(c) of the LLC Agreement.
---------------------------------------------------------------------------

P. Transparency

    In connection with the Transaction, both the Exchange and MC will 
adopt resolutions providing for greater transparency of their 
respective operations. Prior to each annual meeting at which Governors 
or directors, as the case may be, are elected, the Exchange and MC will 
distribute a proxy statement disclosing certain matters regarding each 
of their respective board's activities for the preceding year, 
pertinent information about the independence of Governors and directors 
and compensation data for the Governors and five most highly 
compensated officers of the Exchange.

Q. Undertakings

    In Amendment No. 6, Amex included certain Undertakings that are 
applicable to Amex. These Undertakings commit Amex to (1) not terminate 
Amex's current regulatory services agreement with NASD unless Amex has 
entered into an alternative arrangement for the provision of regulatory 
services that has been approved by the Commission, and to use its best 
efforts to comply with Amex's obligations under the current regulatory 
services agreement, (2) confer periodically with Commission staff 
regarding the status of Amex's regulatory program, and (3) submit 
certain financial information to the Commission.\90\ The purpose of the 
Undertakings is to further ensure that the Exchange will be able to 
perform its regulatory responsibilities and that the Commission will 
have sufficient information to perform its regulatory function.
---------------------------------------------------------------------------

    \90\ See supra note 9.
---------------------------------------------------------------------------

III. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment Nos. 4 and 6, including whether these 
submissions are 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-Amex-2004-50 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-Amex-2004-50. 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

[[Page 78495]]

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 Amex. 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, as 
appropriate, to Amendment No. 4 and/or Amendment No. 6 of File Number 
SR-Amex-2004-50 and should be submitted on or before January 20, 2005.

IV. Discussion

    The Commission has considered the Exchange's proposed rule change, 
as amended, and finds that, in the context in which it was submitted, 
the proposal is consistent with the Act and the rules and regulations 
thereunder applicable to a national securities exchange.\91\ In 
particular, the Commission finds that the proposal is consistent with 
Section 6(b)(1) of the Act,\92\ which requires a national securities 
exchange to be so organized and have the capacity to be able to carry 
out the purposes of the Act and to enforce compliance by its members 
and persons associated with its members with the provisions of the Act, 
the rules or regulations thereunder, and the rules of the Exchange. The 
Commission also finds that the proposal is consistent with Section 
6(b)(3) of the Act,\93\ in that the proposed amendments to the Exchange 
Constitution and other organizational documents are designed to assure 
a fair representation of its members in the selection of its directors 
and administration of its affairs and provide 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. In 
addition, the Commission finds that the proposed rule change is 
consistent with Section 6(b)(5) of the Act,\94\ which requires, among 
other things, that the rules of an exchange be designed to promote just 
and equitable principles of trade; to facilitate transactions in 
securities; to remove impediments to and perfect the mechanisms of a 
free and open market and a national market system; and, in general, to 
protect investors and the public interest.
---------------------------------------------------------------------------

    \91\ In approving the proposed rule change, the Commission has 
considered its impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \92\ 15 U.S.C. 78f(b)(1).
    \93\ 15 U.S.C. 78f(b)(3).
    \94\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Commission discusses below significant aspects of the proposed 
rule change.

A. Exchange Governance Structure

    As outlined below, the Commission generally believes that Amex's 
proposed changes should serve to strengthen and improve the Exchange's 
governance structure and are consistent with the Act. The Commission 
notes, however, that it is in the process of reviewing a range of 
governance issues relating to self-regulatory organizations (``SROs''), 
including possible steps to strengthen the framework for the governance 
of SROs and ways to improve the transparency of the governance 
procedures of all SROs and has proposed rules in furtherance of these 
goals.\95\ Depending upon the results of the proposed rules, the 
Commission may determine that further measures are necessary to 
strengthen the governance of SROs. The Commission also believes that 
the Amex Board should continue to monitor and evaluate the Exchange's 
governance structure and processes on an ongoing basis, and propose 
further changes as appropriate.
---------------------------------------------------------------------------

    \95\ See Securities Exchange Act Release No. 50699 (November 18, 
2004), 69 FR 71126 (December 8, 2004).
---------------------------------------------------------------------------

1. Board of Governors
    The Exchange Constitution provides that within six months after the 
closing of the Transaction, the Exchange will transition to a fifteen 
member board consisting of nine Independent Governors and six Industry 
Governors.\96\ The Commission believes that the proposal to implement a 
majority independent board should increase the Amex Board's ability to 
make judgments in the best interests of the Exchange and investors.
---------------------------------------------------------------------------

    \96\ See Article II, Section 1 of the Exchange Constitution. At 
the first election of the Exchange Board of Governors during the 
six-month transition period, eight of the fifteen Governors will be 
elected to an initial two-year term and the remaining seven 
Governors will be elected to an initial one-year term. The slate of 
initial eight Governors serving two-year terms and the initial 
Governors serving one-year terms shall consist of Independent 
Governors and Industry Governors in approximately equal proportions. 
Thereafter, there will be an annual meeting for the election of 
Governors to succeed those Governors whose terms have expired. All 
Governors elected at the annual meeting for the election of 
Governors will serve two-year terms and will hold office until their 
successors are elected.
---------------------------------------------------------------------------

    The amended Constitution will prohibit an Independent Governor 
from: (i) Having a material business relationship with the Exchange, 
seat holders, or MC; (ii) being a director of a seat holder or AMC; or 
(iii) being employed, affiliated, or associated with members or lessors 
of memberships, and issuers listed on the Exchange.\97\ The Commission 
believes that, with respect to governors, this definition of 
``independent'' is an improvement on the Exchange's current definition 
of ``public.'' In addition, the proposal requires the Board to 
designate an Independent Governor as the ``Lead Governor'' to preside 
over executive sessions of the Exchange Board of Governors if the 
Management Governor is designated as the Chairman of the Board of 
Governors.\98\ The Exchange also will publicly disclose the Lead 
Governor's name and a means by which interested parties may communicate 
with the Lead Governor.\99\ Also, the Commission notes that any quorum 
of Governors required to conduct the business of the Exchange shall 
include a number of Independent Governors at least equal to the number 
of Governors participating in any such meeting who are not Independent 
Governors.\100\
---------------------------------------------------------------------------

    \97\ See Article II, Section 1(a)(1) of the Exchange 
Constitution and supra Section II.C.1 ``Board of Governors.''
    \98\ The Chairman of the Exchange Board of Governors may be the 
Management Governor or any Independent Governor. See Article II, 
Section 3 of the Exchange Constitution.
    \99\ If a Lead Governor has been designated by the Exchange 
Board of Governors, the Lead Governor will exercise the powers and 
discharge the duties of the Chairman in calling and presiding at 
meetings of the Exchange Board of Governors in the case of the 
absence or inability to act of the Chairman. See id.
    \100\ See id., and Amendment No. 4.
---------------------------------------------------------------------------

    The Commission believes that these requirements, including the 
majority ``independence'' standard for the Board and the requirement 
that a Lead Governor be appointed if the Chairman and Chief Executive 
Officer are the same person, should benefit the Exchange by assuring 
that persons responsible for key decisions of the Exchange are free 
from material relationships with--and thus from the potential for 
improper influence by--the Exchange or the entities that the Exchange 
regulates.
    Further, the Commission notes that the amended Constitution 
expressly requires that each Governor will, in exercising his or her 
powers and performing his or her duties, take into consideration the 
self-regulatory function of the Exchange, and the obligations of the 
Exchange (and his or

[[Page 78496]]

her obligations) under the Act and the rules thereunder, including, 
without limitation, Section 6(b)\101\ of the Act.\102\ The Commission 
believes that this requirement should serve to remind Governors that 
they must consider the interests of all Exchange constituents and the 
requirements of the Act when taking actions on behalf of the Exchange.
---------------------------------------------------------------------------

    \101\ 15 U.S.C. 78f(b).
    \102\ See Article II, Section 3 of the Exchange Constitution and 
Amendment No. 4.
---------------------------------------------------------------------------

2. Fair Representation
    Section 6(b)(3) of the Act imposes specific obligations on the Amex 
as a registered national securities exchange to ensure that its members 
are fairly represented in the selection of its Governors and the 
administration of its affairs, and provide that one or more Governors 
shall be representative of issuers and investors and not be associated 
with a member of the Exchange, broker or dealer.\103\ The Commission 
believes that the Amex's proposal is consistent with this requirement.
---------------------------------------------------------------------------

    \103\ 15 U.S.C. 78f(b)(3).
---------------------------------------------------------------------------

    Under the proposal, one of the three members of the Amex Nominating 
and Corporate Governance Committee will be the Membership Governor. 
Amex members will vote for Board Governors and members of the Amex 
Adjudicatory Council \104\ from those nominees selected by this 
Committee and any nominees selected by petition of the members.\105\ 
The Executive Committee also will have at least 20 percent Industry 
Governor representation.\106\
---------------------------------------------------------------------------

    \104\ The Commission notes that the same process applies to the 
election of Trustees of the Exchange. Compare Article II, Section 7 
with Article IX, Section 10 of the Exchange Constitution.
    \105\ See Article III, Section 4 of the Exchange Constitution.
    \106\ The Executive Committee will be comprised of three to five 
members, a majority of whom will be Independent Governors and at 
least one of whom will be an Industry Governor. See Article II, 
Section 6(b) of the Exchange Constitution.
---------------------------------------------------------------------------

    The Commission thus believes that the Exchange's proposed corporate 
governance structure is consistent with Section 6(b)(3) of the 
Act.\107\ The Commission also finds that the requirements that the 
Exchange Board of Governors have nine Independent Governors and also 
include a Governor representing listed companies are consistent with 
Section 6(b)(3) of the Act, which requires that one or more Governors 
be representatives of issuers and investors.\108\
---------------------------------------------------------------------------

    \107\ 15 U.S.C. 78f(b)(3).
    \108\ Id.
---------------------------------------------------------------------------

3. Independence of the Regulatory Function and Key Committees
    The Act requires registered exchanges to be so organized as to have 
the capacity to be able to carry out the purposes of the Act and to 
comply, and, subject to any applicable rule or order of the Commission, 
enforce compliance by its members and persons associated with its 
members, with the provisions of the Act, the rules and regulations 
thereunder, and the rules of the Exchange.\109\ An exchange's 
governance structure should be designed to assure that its regulatory 
function is strong, vigorous, and sufficiently independent and 
insulated from improper influence from management or any regulated 
entity. In the Commission's view, the proposed amendments to the Amex's 
governance and management structure are designed to advance this goal.
---------------------------------------------------------------------------

    \109\ 15 U.S.C. 78f(b)(1).
---------------------------------------------------------------------------

    The Exchange Constitution provides for a Regulatory Oversight 
Committee, which will be composed of three to five Independent 
Governors and a non-voting Industry Governor. The Regulatory Oversight 
Committee will be responsible for, among other things, determining the 
Exchange's regulatory plan, assessing regulatory performance on a 
regular basis, recommending the adoption of rules to the Exchange Board 
concerning regulatory matters, and making periodic reports to the 
Exchange Board. The Amex also has proposed to create a Chief Regulatory 
Officer position. The Chief Regulatory Officer will be appointed by the 
Regulatory Oversight Committee and will report directly to that 
Committee.\110\ The Exchange Board may remove the Chief Regulatory 
Officer only with the Regulatory Oversight Committee's advice and 
consent.
---------------------------------------------------------------------------

    \110\ See Amendment No. 6, supra note 9.
---------------------------------------------------------------------------

    The Commission believes that these proposed amendments to Amex's 
governance structure, and in particular the creation of a Chief 
Regulatory Officer position reporting directly to an independent 
Regulatory Oversight Committee, add a significant degree of 
independence that should serve to insulate the Exchange's regulatory 
activity from economic pressures and potential conflicts of interest. 
The Commission believes that, in this context, the Exchange's proposal 
is consistent with the statutory requirements.
4. Committees
    In addition, the proposed amendments to the Exchange Constitution 
provide for several key Board committees--called Standing Committees--
that have been delegated responsibility over critical Exchange 
operations, thus helping to ensure the transparency of those committees 
to the benefit of the Exchange and the investing public. The Commission 
notes that information about the functions of key Amex committees was 
previously not widely available or specified in the Exchange 
Constitution. The proposed amendments to the Constitution increase 
transparency with respect to several key committees and, thus, their 
accountability to the benefit of the Exchange and the investing public.
    The Commission believes that the composition, duties, 
responsibilities, and guidelines assigned to each of these Standing 
Committees should help foster stronger and more independent governance 
of the Amex.\111\ For example, the Amex Nominating and Corporate 
Governance Committee, which will be composed of three Governors, one of 
whom will be the Membership Governor and the rest of whom will be 
Independent Governors, will be responsible for establishing criteria 
and procedures for the nomination of Governors, Council Members, and 
Trustees, and interviewing and reviewing candidates for such positions. 
This Committee also will have the obligation to monitor the Exchange's 
corporate governance practices, consider and make recommendations 
concerning the composition, organization and functions of the Exchange 
Board, review the Exchange Constitution, and review periodically the 
performance of the Exchange Board. In the Commission's view, having a 
Committee with a majority of Independent Governors reviewing the 
Exchange's corporate governance practices and the performance of the 
Board should help improve the Exchange's governance process.
---------------------------------------------------------------------------

    \111\ The Commission also notes that the Amex Board will not be 
able to re-delegate to any other committee any power granted to a 
Standing Committee. See Article II, Section 6 of the Exchange 
Constitution.
---------------------------------------------------------------------------

    The Compensation Committee, which will be composed of three to five 
Independent Governors, will be responsible for reviewing and approving 
performance goals relevant to the compensation of the Chief Executive 
Officer, and for evaluating the Chief Executive Officer's performance 
in light of these goals, as well as recommending to the Board the 
compensation of the Chief Executive Officer and other executive 
officers. In addition, the requirement that the Committee make public 
annually the compensation of the Governors of the Exchange and the five

[[Page 78497]]

most highly compensated officers of the Exchange should increase the 
transparency of this Committee's actions and improve accountability of 
the Exchange's most senior officers.
    The Exchange also will have a fully independent Audit Committee 
that will have the authority to make recommendations to the Board as to 
the selection and retention of the Exchange's independent public 
accountants, and will appoint the internal auditors. The internal 
auditors will report directly to the Audit Committee and, to the extent 
they are officers or employees of the Exchange, to the Chief Executive 
Officer (or the Chief Executive Officer's designee), but cannot be 
terminated without the advice and consent of the Audit Committee. The 
Commission believes that the responsibilities assigned to the Amex's 
Audit Committee are appropriate, particularly with respect to the 
Audit's Committee's direct responsibility for assuring that the Amex 
retain suitable public accountants and appointing the Exchange's 
internal auditors.
5. Improved Transparency
    Finally, the Commission believes that the commitments by the 
Exchange and MC to adopt resolutions providing for greater transparency 
of their respective operations are important steps. Together with the 
revised governance structure and implementation of key Amex committees, 
such increased disclosure of the decision-making processes and the 
basis for Exchange and MC actions should benefit the Exchange, its 
constituencies, and investors.

B. Self-Regulatory Function of the Exchange

    Upon the close of the Transaction, Amex will continue to be 
responsible for discharging its regulatory obligations under the Act, 
in particular Sections 6(b) and 19(g) of the Act.\112\ Amex, however, 
will be wholly owned by MC, which will have a separate Board of 
Directors whose consent will be required for Amex to take certain 
actions.\113\ Certain provisions of the Amex Constitution, LLC 
Agreement, MC Certificate of Incorporation, and MC Bylaws are designed 
to facilitate the ability of Amex and the Commission to fulfill their 
regulatory obligations under the Act with respect to Amex.\114\
---------------------------------------------------------------------------

    \112\ 15 U.S.C. 78f(b) and 15 U.S.C. 78s(g). To assist the 
Exchange in fulfilling its regulatory responsibilities, Amex has 
entered into a regulatory services contract (``RSA'') with NASD. The 
Commission notes that, under the terms of the RSA and consistent 
with the Amex's Constitution, any action taken by NASD, or its 
employees or authorized agents, acting on behalf of Amex pursuant to 
the RSA will be deemed to be an action taken by the Exchange. 
Importantly, however, Amex will retain ultimate legal responsibility 
for, and control of, its self-regulatory responsibilities. See 
Exchange Act Release No. 50122 (July 29, 2004), 69 FR 47962 (August 
6, 2004) (approving an amendment to Article III, Section 2 of the 
Exchange Constitution permitting the Amex to enter into a regulatory 
services agreement with another self-regulatory organization).
    \113\ See supra discussion under Section II.D ``Matters 
Requiring Consent of MC or the Exchange Members.''
    \114\ The Commission notes that it is in the process of 
reviewing issues relating to new ownership structures of SROs, and 
has proposed rules relating to the ownership of SROs, including 
imposing limitations on member ownership of an SRO or facility of an 
SRO. See Securities Exchange Act Release No. 50699, supra note 95.
---------------------------------------------------------------------------

    In particular, all confidential information of the Exchange 
pertaining to the self-regulatory function of the Exchange, including 
all books and records of the Exchange reflecting such confidential 
information will be retained in confidence by each Governor, the 
Exchange and its personnel. In addition, such confidential information 
will not be used by any Governor, the Exchange or its personnel for any 
non-regulatory purposes, and shall not be made available to any persons 
(including, without limitation, any members of the Exchange). Such 
confidential information may only be disclosed: (i) To those personnel 
of the Exchange and to members of the Board of Governors of the 
Exchange to the extent necessary or appropriate to properly discharge 
the self-regulatory responsibilities of the Exchange; (ii) to the 
extent required by applicable statute, rule or regulation or any court 
of competent jurisdiction; and (iii) to the extent that such 
confidential information has become generally available publicly 
through no fault of the Exchange or its Governors, officers, employees 
or advisors.\115\
---------------------------------------------------------------------------

    \115\ See Article II, Section 3 of the Exchange Constitution. 
Also, the Exchange and MC will be required to keep all books and 
records in the United States. See Section 2.1 of the LLC Agreement 
and Section 6.02 of the MC Bylaws.
---------------------------------------------------------------------------

    All confidential information of Amex pertaining to the self-
regulatory function of Amex, including books, minutes and records of 
Amex reflecting such confidential information (including but not 
limited to regulatory investigations, examinations, disciplinary 
matters, and to the extent designated by Amex as confidential, trading 
data and practices) which shall come into the possession of MC, the 
officers, directors, employees or agents of MC, shall be retained in 
confidence by MC and the officers, directors, employees and agents of 
MC and shall not be used for any non-regulatory purposes.\116\
---------------------------------------------------------------------------

    \116\ See Section 16 of the MC Certificate of Incorporation and 
Section 7.08 of the MC Bylaws.
---------------------------------------------------------------------------

    Also, for so long as MC shall control, directly or indirectly, the 
Exchange, each officer, director and employee of MC shall give due 
regard to the preservation of the independence of the self-regulatory 
function of the Exchange and to the Exchange's obligations under the 
Act and the rules thereunder, including, without limitation, Section 
6(b) of such Act,\117\ and shall not take any actions which he or she 
knows or reasonably should have known would interfere with the 
effectuation of any decisions by the Board of Governors of the Exchange 
relating to its regulatory functions (including disciplinary matters) 
or which would adversely affect the ability of the Exchange to carry 
out its responsibilities under the Act.\118\
---------------------------------------------------------------------------

    \117\ 15 U.S.C. 78f(b).
    \118\ See Section 13 of the MC Certificate of Incorporation and 
Section 7.05 of the MC Bylaws.
---------------------------------------------------------------------------

    The Commission believes that these provisions, which are designed 
to help maintain the independence of Amex's self-regulatory function 
and protect from improper use confidential information pertaining to 
the self-regulatory function of the Exchange, are consistent with the 
Act.
    The Commission also notes that no distribution made by the Exchange 
shall include revenues received by the Exchange from regulatory fines, 
fees or penalties.\119\ The Commission finds that this prohibition is 
consistent with Section 6(b)(3) of the Act \120\ because it will help 
to ensure that the regulatory authority of the Exchange is not used 
improperly to benefit the Exchange's owner(s).
---------------------------------------------------------------------------

    \119\ See Section 4.6(c) of the LLC Agreement.
    \120\ 15 U.S.C. 78f(b)(3).
---------------------------------------------------------------------------

C. Changes in Ownership and Control of Amex

    Certain provisions of the proposed rule change require that any 
direct and indirect changes in ownership of the Exchange be subject to 
prior Commission review. The Commission believes that these 
restrictions, which are designed to prevent any owner from exercising 
undue control over the operation of Amex, are consistent with the Act.
    In particular, any sale, issuance, transfer or other disposition of 
any equity security in Amex--including any LLC interest--is subject to 
prior approval by the Commission pursuant to the rule filing procedure 
under Section 19 of the Act,\121\ and the rules promulgated 
thereunder.\122\ Any

[[Page 78498]]

attempt to issue or transfer any such equity interests or any rights 
thereunder in violation of these requirements shall be null and void ab 
initio. In addition, any sale, issuance, transfer or other disposition 
of any equity interest in MC or MC Subsidiary, other than the sale or 
transfer of seats or membership interests in MC, also shall be subject 
to prior approval by the Commission pursuant to the rule filing 
procedure under Section 19 of the Act,\123\ and the rules promulgated 
thereunder, and any attempt to issue or transfer any such equity 
interests or any rights thereunder in violation of these requirements 
shall be null and void ab initio.\124\
---------------------------------------------------------------------------

    \121\ 15 U.S.C. 78s.
    \122\ See Section 9.3 of the LLC Agreement. Specifically, 
Section 9.3 provides that any sale, issuance, transfer or other 
disposition in any single transaction or series of transactions of 
(A) any limited liability company interests or other equity security 
of the Exchange or any securities convertible into or exchangeable 
for, or options rights or warrants to acquire, any such equity 
securities or (B) any notes or debt securities containing equity 
features (including, without limitation, any notes or debt 
securities convertible into or exchangeable for any equity 
securities or containing profit participation features) shall (i) be 
made only in compliance with the member vote procedures set forth in 
Section 7(a) of the MC Certificate; and (ii) be subject to prior 
approval by the Commission pursuant to the rule filing procedure 
under Section 19 of the Act, and the rules promulgated thereunder.
    \123\ 15 U.S.C. 78s.
    \124\ See Section 7(c) of the MC Certificate of Incorporation.
---------------------------------------------------------------------------

    Among other things, these provisions are designed to provide the 
Commission with the opportunity to determine what, if any, additional 
measures might be necessary to provide appropriate oversight of a 
proposed controlling person of Amex.
D. Regulatory Jurisdiction Over MC
    Certain of the terms of the MC governing documents are designed to 
help enable the Commission to carry out its oversight responsibilities 
under the Act. Specifically, the MC Certificate of Incorporation and 
the MC Bylaws provide that, for so long as MC shall control, directly 
or indirectly, the Exchange, the books, minutes, and records of MC 
shall be deemed to be those of Amex for the purposes of Section 17(b) 
of the Act \125\ to the extent that such books, minutes, and records 
are related to the activities of the Exchange.\126\ Furthermore, MC's 
books and records will be subject to inspection and copying by the 
Commission and the Exchange.\127\ Likewise, for purposes of the removal 
and censure authority of the Commission pursuant to Section 19(h)(4) of 
the Act,\128\ the officers and directors of MC shall be deemed to be 
officers and directors of Amex.\129\
---------------------------------------------------------------------------

    \125\ 15 U.S.C. 78q(b).
    \126\ See Section 12 of the MC Certificate of Incorporation and 
Section 6.02 of the MC Bylaws.
    \127\ See id.
    \128\ 15 U.S.C. 78s(h)(4).
    \129\ See Section 13 of the MC Certificate of Incorporation and 
Section 7.05 of the MC Bylaws.
---------------------------------------------------------------------------

    Further, for so long as MC shall control, directly or indirectly, 
the Exchange, MC shall, and the officers, directors and employees of MC 
by virtue of their acceptance of such position shall be deemed to agree 
to cooperate with the Commission and the Exchange in respect of said 
Commission's oversight responsibilities regarding the Exchange and the 
self-regulatory functions and responsibilities of the Exchange.\130\ MC 
shall take reasonable steps to ensure that its agents similarly 
cooperate with the Commission.\131\
---------------------------------------------------------------------------

    \130\ See Section 15 of the MC Certificate of Incorporation and 
Section 7.07 of the MC Bylaws.
    \131\ See id.
---------------------------------------------------------------------------

    The MC Certificate of Incorporation and the MC Bylaws also provide 
that, for so long as MC shall control, directly or indirectly, the 
Exchange, MC shall, and its officers, directors and employees by virtue 
of their acceptance of such position shall be deemed to, irrevocably 
submit to the exclusive jurisdiction of the United States Federal 
courts, the Commission, and the Exchange, for the purposes of any suit, 
action or proceeding pursuant to the United States Federal securities 
laws, and the rules or regulations thereunder, arising out of, or 
relating to the activities of the Exchange. In addition, MC shall, and 
by virtue of their acceptance of any such position, the officers, 
directors and employees of MC shall be deemed to, waive and agree not 
to assert by way of motion, as a defense or otherwise in any such suit, 
action or proceeding, any claims that it or they are not personally 
subject to the jurisdiction of the Commission as to such matters, that 
the suit, action or proceeding is an inconvenient forum or that the 
venue of the suit, action or proceeding is improper, or that the 
subject matter thereof may not be enforced in or by such courts or 
agency.\132\
---------------------------------------------------------------------------

    \132\ See Section 14 of the MC Certificate of Incorporation and 
Section 7.06 of the MC Bylaws.
---------------------------------------------------------------------------

    Pursuant to the MC Certificate of Incorporation and MC Bylaws, MC 
will take reasonable steps to ensure that its officers, directors and 
employees comply with various provisions of the MC Certificate of 
Incorporation, including the books and records, jurisdiction, 
confidential information, and cooperation provisions.\133\ Such steps 
shall include obtaining from MC officers, directors and employees, as a 
condition to their initial or continued employment or service as a 
director, a written commitment that they will comply with or consent 
to, as the case may be, such provisions.\134\
---------------------------------------------------------------------------

    \133\ See Section 17 of the MC Certificate of Incorporation and 
Section 7.09 of the MC Bylaws.
    \134\ See id.
---------------------------------------------------------------------------

    The Commission also notes that, even in the absence of these 
provisions of the MC Certificate of Incorporation and MC Bylaws, 
Section 20(a) of the Act \135\ provides that any person with a 
controlling interest in the Exchange would be jointly and severally 
liable with and to the same extent that the Exchange is liable under 
any provision of the Act, unless the controlling person acted in good 
faith and did not directly or indirectly induce the act or acts 
constituting the violation or cause of action. In addition, Section 
20(e) of the Act \136\ creates aiding and abetting liability for any 
person who knowingly provides substantial assistance to another person 
in violation of any provision of the Act or rule thereunder, and 
Section 21C of the Act \137\ authorizes the Commission to enter a 
cease-and-desist order against any person who has been ``a cause of'' a 
violation of any provision of the Act through an act or omission that 
the person knew or should have known would contribute to the violation.
---------------------------------------------------------------------------

    \135\ 15 U.S.C. 78t(a).
    \136\ 15 U.S.C. 78t(e).
    \137\ 15 U.S.C. 78u-3.
---------------------------------------------------------------------------

    The Commission believes that, taken together, these provisions, 
which are designed to facilitate the ability of the Commission to 
exercise appropriate oversight over the Exchange and MC, are consistent 
with the Act.

E. Amendments to the Certificate of Incorporation and Bylaws of The 
Amex Membership Corporation

    Section 19(b) of the Act \138\ and Rule 19b-4 thereunder \139\ 
require an SRO to file proposed rule changes with the Commission. 
Although MC is not an SRO, certain provisions of its Certificate of 
Incorporation and Bylaws may be rules of an exchange \140\ if they are 
the stated policies, practices, and interpretations, as defined in Rule 
19b-4 of the Act, of the Amex. Any proposed rule or any proposed change 
in, addition to, or deletion from the rules of an exchange must be 
filed pursuant to Section 19(b) of the Act and Rule 19b-

[[Page 78499]]

4 thereunder.\141\ Accordingly, Amex has filed the MC Certificate of 
Incorporation and MC Bylaws with the Commission.
---------------------------------------------------------------------------

    \138\ 15 U.S.C. 78s(b).
    \139\ 17 CFR 240.19b-4.
    \140\ Section 3(a)(27) of the Act, 15 U.S.C. 78c(a)(27), defines 
the rules of an exchange to be the constitution, articles of 
incorporation, bylaws, and rules, or instruments corresponding to 
the foregoing, of an exchange, and such stated policies, practices, 
or interpretations of such exchange as the Commission, by rule, may 
determine to be necessary or appropriate in the public interest or 
for the protection of investors to be deemed to be rules of such 
exchange.
    \141\ For so long as MC shall control, directly or indirectly, 
Amex, before any change or addition to the MC Certificate of 
Incorporation or MC Bylaws shall be effective, the same shall be 
submitted to the Board of Governors of the Exchange and if said 
Board shall determine that the same constitutes a ``rule of an 
exchange'' as such term is defined in the Act and the rules 
promulgated thereunder and must be filed with or filed with and 
approved by the Commission before the same may be effective, under 
Section 19 of the Act and the rules promulgated thereunder, then the 
same shall not be effective until filed with or filed with and 
approved by said Commission, as the case may be. See Section 18 of 
the MC Certificate of Incorporation and Section 9.01 of the MC 
Bylaws.
---------------------------------------------------------------------------

V. Accelerated Approval of Amendment Nos. 4 and 6

    Pursuant to Section 19(b)(2) of the Act,\142\ the Commission may 
not approve any proposed rule change, or amendment thereto, prior to 
the thirtieth day after the date of publication of the notice of filing 
thereof, unless the Commission finds good cause for so finding. The 
Commission hereby finds good cause for approving Amendment Nos. 4 and 6 
to the proposed rule change prior to the thirtieth day after publishing 
notice of the same in the Federal Register pursuant to Section 19(b)(2) 
of the Act.\143\
---------------------------------------------------------------------------

    \142\ 15 U.S.C. 78s(b)(2).
    \143\ Id.
---------------------------------------------------------------------------

    Amendment No. 4 revises the first paragraph of Section 3 of Article 
II of the Exchange Constitution (Powers and Duties).\144\ Specifically, 
Amendment No. 4 clarifies that Exchange Board members, among other 
things, would be required to take into consideration the self-
regulatory function of the Exchange and the Exchange's obligations (and 
their obligations) under the Act. Because Amendment No. 4 simply 
clarifies the intent of the proposed rule, which has been noticed for 
public comment, the Commission believes that accelerating the 
effectiveness of Amendment No. 4 is consistent with the public interest 
and the protection of investors, and will not impose any significant 
burden on competition.
---------------------------------------------------------------------------

    \144\ See supra note 7.
---------------------------------------------------------------------------

    Amendment No. 6 revises Section 4(a) and Section 4(d) of Article II 
of the Exchange Constitution (Powers and Duties) relating to the Chief 
Regulatory Officer and set out certain undertakings applicable to 
Amex.\145\ By amending the proposed rule to provide that the Chief 
Regulatory Officer will report only to the Regulatory Oversight 
Committee, and not, in addition, to the Exchange Chief Executive 
Officer (or Chief Executive Officer's designee), Amendment No. 6 would 
effectively further increase the independence of the Chief Regulatory 
Officer. Amendment No. 6 also contains Undertakings pursuant to which 
Amex agrees to (1) not terminate Amex's current regulatory services 
agreement with NASD unless Amex has entered into an alternative 
arrangement for the provision of regulatory services that has been 
approved by the Commission, and to use its best efforts to comply with 
Amex's obligations under the current regulatory services agreement, (2) 
confer periodically with Commission staff regarding the status of 
Amex's regulatory program, and (3) submit certain financial information 
to the Commission. These proposals, which are designed to further 
ensure that the Exchange will be able to perform its regulatory 
responsibilities and to provide the Commission sufficient information 
to aid it in performing its regulatory oversight responsibilities, are 
consistent with the public interest and the protection of investors, 
and will not impose any significant burden on competition. Therefore, 
the Commission finds that good cause exists to accelerate approval of 
Amendment Nos. 4 and 6 to the proposed rule change, pursuant to Section 
19(b)(2) of the Act.\146\
---------------------------------------------------------------------------

    \145\ See supra note 9 and Section II.Q.
    \146\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

VI. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change, as amended, is consistent with the Act and rules and 
regulations thereunder applicable to a national securities exchange.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\147\ that the proposed rule change, including Amendment Nos. 1, 2 
and 3 thereto (SR-Amex-2004-50) be, and hereby is, approved, and that 
Amendment Nos. 4 and 6 thereto are approved on an accelerated basis. 
The proposed rule change shall be effective upon the closing of the 
Transaction described herein.
---------------------------------------------------------------------------

    \147\ Id.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-28600 Filed 12-29-04; 8:45 am]
BILLING CODE 8010-01-P