[Federal Register Volume 70, Number 12 (Wednesday, January 19, 2005)]
[Notices]
[Pages 3085-3086]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-193]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51033; File No. SR-NSX-2004-12]


Self-Regulatory Organizations; Order Granting Approval to a 
Proposed Rule Change by the National Stock Exchange To Eliminate the 
``CBOE Exerciser Member'' Membership Class, To Eliminate the Exchange's 
Special Nominating Committee, and To Remove Certain Special 
Restrictions on Changes to Certain NSX By-Laws and Rules

January 13, 2005.

I. Introduction

    On October 21, 2004, the National Stock Exchange (``NSX'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to amend its by-laws and rules in order to 
eliminate the ``CBOE Exerciser Member'' membership class, to eliminate 
NSX's Special Nominating Committee, and to remove certain special 
restrictions on making changes to various NSX by-laws and rules. Notice 
of the proposed rule change was published for comment in the Federal 
Register on December 10, 2004.\3\ No comments were received regarding 
the proposal. This order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 50796 (December 6, 
2004), 69 FR 32639.
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II. Background

    On November 14, 1986, the Cincinnati Stock Exchange (``CSE''), now 
known as the NSX, and CBOE entered into an agreement of affiliation 
pursuant to which CBOE currently holds 162 certificates of proprietary 
membership of NSX and CBOE and its members have certain rights 
associated with NSX. The rights CBOE gained as a result of the 
affiliation include the right for CBOE members to become Proprietary 
Members of NSX without having to purchase or own certificates of 
proprietary membership, provided that each such CBOE member meets all 
other eligibility requirements for NSX membership (such CBOE members 
are referred to as ``Proprietary Members without certificates'' or 
``CBOE Exerciser Members''). CBOE also gained the right to hold six out 
of the thirteen seats on the NSX's Board of Directors and the right to 
hold three of the six seats on the newly created Special Nominating 
Committee, which is tasked with nominating the Public Directors to the 
NSX board. Furthermore, as part of the agreement of affiliation, the 
NSX agreed to adopt special restrictions on amending certain provisions 
of the NSX by-laws and rules. These terms of the agreement of 
affiliation were implemented through changes to NSX's by-laws and 
rules.\4\
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    \4\ See Securities Exchange Act Release Nos. 23868 (December 9, 
1986), 51 FR 44958 (December 15, 1986) (notice of proposed changes 
to CSE by-laws and rules to implement agreement of affiliation) and 
24090 (February 12, 1987), 52 FR 5225 (February 19, 1987) (order 
approving changes to CSE by-laws and rules to implement agreement of 
affiliation).
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    NSX and CBOE recently agreed to amend and terminate certain aspects 
of their affiliation and entered into a termination of rights agreement 
on September 27, 2004 (``Termination Agreement''). Under the 
Termination Agreement, CBOE agreed to transfer certain of its 
certificates of proprietary membership to NSX and to relinquish certain 
rights associated with NSX in exchange for certain cash payments and 
other undertakings by NSX, subject to the terms and conditions set 
forth in the Termination Agreement. The initial closing for the 
Termination Agreement is conditioned upon Commission approval of the 
amendments to the NSX by-laws and rules contained in this proposed rule 
change.

III. Description of the Proposal

    Under the proposal, NSX would eliminate the CBOE Exerciser Member 
membership class and the related special privilege for CBOE members to 
become NSX members without purchasing certificates of proprietary 
membership. In eliminating this class of membership and this special 
privilege, the Exchange would provide a transition period whereby all 
CBOE Exerciser Members would have ninety days from the date of the 
approval of this proposed rule change to purchase certificates of 
proprietary membership from NSX. During such ninety day period, a CBOE 
Exerciser Member who has not purchased a certificate of propriety 
membership would continue to have the rights and obligations of a 
Proprietary Member without certificate as those rights and obligations 
existed prior to

[[Page 3086]]

the date of approval of this proposal. At the conclusion of the ninety 
day period, however, any CBOE Exerciser Member who does not own an NSX 
certificate of proprietary membership would automatically cease to 
qualify for membership on the Exchange and would not become a member of 
the Exchange again without first complying with all the procedures and 
requirements set forth in the NSX by-laws and rules to do so. In 
relation to the elimination of the membership class of CBOE Exerciser 
Members, NSX would also eliminate the ``CBOE Exercise Application'' fee 
and other references in its by-laws to ``Proprietary Members without 
certificates.''
    In addition, the proposal would eliminate NSX's Special Nominating 
Committee, which is composed of two Designated Dealer Directors, the 
At-Large Director and three of the six CBOE Directors and which has the 
responsibility of nominating candidates for Public Director positions 
on the NSX board. NSX proposes to re-assign the responsibility of 
nominating Public Directors to the NSX's Nominating Committee, which 
currently nominates candidates for the Designated Dealer Director and 
At-Large Director board positions. Finally, the proposal would 
eliminate the special limitations on changes to certain NSX by-laws and 
rules contained in Article XII of the NSX by-laws.

IV. Discussion

    The Commission has reviewed the proposed rule change and finds that 
it is consistent with the Act and the rules and regulations thereunder 
applicable to a national securities exchange.\5\ Specifically, the 
Commission finds that the proposed rule change furthers the objectives 
of Section 6(b)(1) \6\ of the Act, which requires the Exchange to be so 
organized and have the capacity to be able to carry out the purposes of 
the Act and to comply, and to enforce compliance by its members, with 
the Act and the rules of the Exchange. In addition, the Commission 
finds that the proposed rule change is consistent with Section 6(b)(5) 
of the Act,\7\ which requires, among other things, that the rules of a 
national securities exchange be designed to promote just and equitable 
principles of trade, to remove impediments to and perfect the mechanism 
of a free and open market and a national market system, and, in 
general, to protect investors and the public interest.
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    \5\ In approving this proposed rule change, the Commission notes 
that it has considered the proposed rule's impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f).
    \6\ 15 U.S.C. 78f(b)(1).
    \7\ 15 U.S.C. 78f(b)(5).
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    The Commission notes that NSX and CBOE have recently agreed to the 
Termination Agreement, which would amend and terminate certain aspects 
of their affiliation. The Commission also notes that NSX seeks to 
eliminate provisions of its by-laws and rules that were adopted to 
implement the terms of the original agreement of affiliation between 
NSX and CBOE.\8\ In particular, the Commission notes that the proposal 
would eliminate the CBOE Exerciser membership class. Under the 
proposal, the removal of the CBOE Exerciser membership class would be 
deferred until the conclusion of a ninety-day transition period. The 
Commission believes that ninety days should be a reasonable period of 
time for interested CBOE members to purchase the requisite certificates 
of proprietary membership. In addition, the Commission notes that the 
proposal would remove special voting limitations on changes to its by-
laws, and amend the provisions of its by-laws regarding the Special 
Nominating Committee. The Commission believes that these provisions are 
no longer necessary as a result of the amendments to NSX's affiliation 
with CBOE under the Termination Agreement.
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    \8\ See supra note 4.
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V. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change is consistent with the Act and the rules and regulations 
thereunder applicable to a national securities exchange, and, in 
particular, with Sections 6(b)(1) \9\ and 6(b)(5) \10\ of the Act.
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    \9\ 15 U.S.C. 78f(b)(1).
    \10\ 15 U.S.C. 78f(b)(5).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\11\ that the proposed rule change (File No. SR-NSX-2004-12) is 
approved.
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    \11\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. E5-193 Filed 1-18-05; 8:45 am]
BILLING CODE 8010-01-P