[Federal Register Volume 70, Number 108 (Tuesday, June 7, 2005)]
[Notices]
[Pages 33238-33243]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-2892]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51765; File No. SR-NSX-2005-02]


Self-Regulatory Organizations; National Stock Exchange; Notice of 
Filing of Proposed Rule Change, and Amendments No. 1 and 2 Thereto, 
Relating to the Composition of NSX's Board of Directors and Committees

May 31, 2005.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on March 31, 2005, the National Stock ExchangeSM (the 
``Exchange'' or ``NSX''SM) filed with the Securities and 
Exchange Commission (``Commission'') the proposed rule change as 
described in Items I, II, and III below, which Items have been prepared 
by NSX. On March 31, 2005, the Exchange filed Amendment No. 1 to the 
proposed rule change.\3\ On May 19, 2005, the Exchange filed Amendment 
No. 2 to the proposed rule change.\4\ The Commission is publishing this 
notice to solicit comments on the proposed rule change, as amended, 
from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, the Exchange corrected page numbering 
errors in the initial filing. Amendment No. 1 replaced the original 
filing in its entirety.
    \4\ In Amendment No. 2, the Exchange revised the proposed 
definition of ``Independent Director.''
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend its By-Laws to make modifications to 
the composition of its Board of Directors (``Board'') and committees. 
These changes are being made in connection with a termination of rights 
agreement entered into between NSX and the Chicago Board Options 
Exchange (``CBOE'') and in order to comport with

[[Page 33239]]

industry trends and anticipated changes in regulatory requirements.
    Below is the amended text of the proposed rule change. Proposed new 
language is in italics; proposed deletions are in [brackets].
* * * * *

CODE OF REGULATIONS (BY-LAWS) OF NATIONAL STOCK EXCHANGE

ARTICLE I. Definitions

Section 1. When used in this Code of Regulations (By-Laws), unless the 
context otherwise requires--
    (a)-(e). No change.
    (f) The term ``CBOE'' shall mean the Chicago Board Options 
Exchange, Incorporated.
    (g) The term ``CBOE member(s)'' shall mean an individual CBOE 
member or a CBOE member organization that is a regular member of CBOE 
as described in Article II, Section 2.1(b) of the CBOE Constitution or 
that is a special member of CBOE as described in Article II Section 
2.1(d) of the CBOE Constitution as such CBOE members may exist from 
time to time.
    [(f)] (h) The term ``Commission'' means the United States 
Securities and Exchange Commission.
    [(g)] (i) The term ``Exchange'' means National Stock Exchange.
    [(h)] (j) The term ``Exchange Rules'' means those rules adopted by 
the Exchange pursuant to the provisions of Article X of these By-Laws.
    (k) The term ``Independent Director'' means a member of the Board 
that the Board has determined to have no material relationship with the 
Exchange or any affiliate of the Exchange, any member of the Exchange 
or any affiliate of any such member, other than as a member of the 
Board.
    [(i)] (l) The term ``person'' means a natural person, company, 
government, or political subdivision, agency or instrumentality of a 
government.
    [(j)] (m) The terms ``person associated with a member'' or 
``associated person of a member'' mean any partner, officer, director, 
or branch manager of a member (or any person occupying a similar status 
or performing similar functions), any person directly or indirectly 
controlling, controlled by, or under common control with the member, of 
any employee of such member, except that any person associated with a 
member whose functions are solely clerical or ministerial shall not be 
included in the meaning of such terms.
    [(k)] (n) The term ``Proprietary Member'' means a person who was a 
``Regular Member'' prior to the effective date of these By-Laws or a 
person who, pursuant to the provisions of Article II of these By-Laws, 
has applied for, and been admitted to, membership as a proprietary 
member subsequent to the effective date of these By-Laws.
    [(l)] (o) The term ``statutory disqualification'' shall mean any 
statutory disqualification as defined in the Act.
    [(m) The term ``CBOE'' shall mean the Chicago Board Options 
Exchange, Incorporated.]
    [(n) The term ``CBOE member(s)'' shall mean an individual CBOE 
member or a CBOE member organization that is a regular member of CBOE 
as described in Article II, Section 2.1(b) of the CBOE Constitution or 
that is a special member of CBOE as described in Article II Section 
2.1(d) of the CBOE Constitution as such CBOE members may exist from 
time to time, except that in the case of a transferable regular CBOE 
membership which is subject to a lease agreement, the lessee and not 
the lessor shall be deemed to be the CBOE member].
* * * * *

ARTICLE V. Exchange Organization and Administration

Section 1. Board of Directors
    [1.1. General]
    (a) General Composition. The management and administration of the 
affairs of the Exchange shall be vested in a Board of Directors, which 
shall be composed of thirteen (subject to Section 1(b)) voting 
Directors (a majority of whom will be independent pursuant to Section 
1(b)), as follows:
    [(a)] (i) the Chief Executive Officer of the Exchange [President];
    [(b) two] (ii) three Proprietary Members, or executive officers of 
Proprietary Member organizations[, who are Designated Dealers in the 
National Securities Trading System (``Designated Dealer Directors''); 
(c) one Proprietary Member or an executive officer of a Proprietary 
Member organization, who conducts a nonmember public customer business 
on the Exchange (``At-Large] (``Member Directors'');
    (iii) six Independent Directors (subject to increase under Section 
1(b) below); and
    [(d) the Chairman of CBOE (``CBOE Director''); (e) the President of 
CBOE (``CBOE Director''); (f) four] (iv) three executive officers of 
CBOE, CBOE members or executive officers of CBOE member organizations 
(``CBOE Directors'')[; and (g) three representatives of issuers and 
investors who shall not be associated with any member of the Exchange 
or with any registered broker or dealer or with another self-regulatory 
organization, other than as a public trustee or director (``Public 
Director'')].
    Excepting affiliations with national securities exchanges, no two 
or more Directors may be partners, officers of directors of the same 
person or be affiliated with the same person.
    (b) Changes in Composition on the Occurrence of Certain Events. 
Notwithstanding the provisions of Section 1(a) of this Article V:
    (i) The current terms of the Directors currently serving as of the 
effective date of this provision of these By-laws (the ``Effective 
Date'') shall be unchanged.
    (ii) Following the Effective Date, the three new Independent 
Directors who are authorized by Section 1(a)(iii) (``New Independent 
Directors'') shall be either (as determined by the Board) (y) selected 
in accordance with Sections 2.1(c) and 2.2(b) of this Article V, except 
that each candidate for New Independent Director shall be submitted by 
the Nominating Committee to the Board for approval or disapproval as 
soon as practical, or (z) appointed in accordance with Sections 2.1(c) 
and 3 of this Article V.
    (iii) On the date of the first Subsequent Closing (as defined 
below) to occur after January 18, 2005, the number of positions on the 
Board to be filled by CBOE Directors shall be reduced from three to two 
and the number of positions to be filled by Independent Directors shall 
be increased from six to seven. Following the first Subsequent Closing, 
a new Independent Director shall be either (as determined by the Board) 
(y) selected in accordance with Sections 2.1(c) and 2.2(b) of this 
Article V, except that the candidate for Independent Director shall be 
submitted by the Nominating Committee to the Board for approval or 
disapproval as soon as practical, or (z) appointed in accordance with 
Sections 2.1(c) and 3 of this Article V.
    (iv) If no Subsequent Closing has occurred prior to February 15, 
2006, then in order to achieve a majority of Independent Directors 
serving on the Board, the Board may, in its discretion, add up to two 
new Independent Directors and thereby increase the number of Directors 
serving on the Board from thirteen to not more than fifteen. In such 
event the two new Independent Directors authorized hereby shall be 
either (as determined by the Board) (y) selected in accordance with 
Sections 2.1(c) and 2.2(b) of this Article V, except that each 
candidate for Independent Director shall be submitted by the Nominating 
Committee to the Board for approval or disapproval as soon as 
practical, or (z) appointed in

[[Page 33240]]

accordance with Sections 2.1(c) and 3 of this Article V.
    (v) On the date of the second Subsequent Closing to occur after 
January 18, 2005, the number of positions on the Board to be filled by 
CBOE Directors shall be reduced from two to one, and the Board may, in 
its discretion, increase by one the number of positions to be filled by 
either Independent Directors or Member Directors. Following the second 
Subsequent Closing, a new Director may be either (as determined by the 
Board) (y) elected or appointed in accordance with Sections 2.1 and 2.2 
of this Article V, except that the requisite action may be taken as 
soon as practical, or (z) appointed in accordance with Sections 2.1 and 
3 of this Article V.
    (vi) On the earliest to occur of (A) the date on which CBOE owns 
less than five percent (5%) of the outstanding certificates of 
proprietary membership of the Exchange or (B) the third anniversary of 
the fourth Subsequent Closing (the earliest of these to occur being the 
``CBOE Withdrawal Date''), the number of positions on the Board to be 
filled by CBOE Directors shall be reduced from one to zero, and the 
Board may, in its discretion, increase by one the number of positions 
to be filled by either Independent Directors or Member Directors. The 
remaining CBOE Director shall be deemed to have resigned from the Board 
as of the CBOE Withdrawal Date. Following the CBOE Withdrawal Date, a 
new Director may be either (as determined by the Board) (y) elected or 
appointed in accordance with Sections 2.1 and 2.2 of this Article V, 
except that the requisite action may be taken as soon as practical, or 
(z) appointed in accordance with Sections 2.1 and 3 of this Article V.
    (vii) ``Subsequent Closing'' has the meaning given to it in the 
Termination of Rights Agreement between CBOE and the Exchange dated as 
of September 27, 2004.
    [1.2. Term
    Notwithstanding Paragraphs 1.1 and 2.1 and 2.2 below, from the 
effective date of this provision of these By-Laws to the first Board of 
Directors meeting after the annual election meeting in 1988, 1989 or 
1990, as appropriate, the initial terms of the Exchange Directors shall 
be as follows:

Public Director--1990
Public Director--1989
Public Director--1988
President of the Exchange--1988
Designated Dealer Director--1990
Designated Dealer Director--1989
At-Large Director--1988
Chairman of CBOE--1988
President of CBOE--1988
CBOE Director--1988
CBOE Director--1988
CBOE Director--1988
CBOE Director--1988]
Section 2. Election of Directors
    2.1. Terms of Office
    (a) The board term of the Chief Executive Officer shall expire when 
such individual ceases to be Chief Executive Officer of the Exchange.
    [(a)] (b) The [a Designated Dealer] Member Directors [, At-Large 
Director or Public Director] shall be divided into three classes, each 
initially composed of no more than one Member Director. Each Member 
Director shall be elected for a term expiring at the third successive 
annual meeting of the membership, or when such Director's successor is 
thereafter elected and qualified, and shall be identified as being of 
the same class as the Director such Director succeeds. Notwithstanding 
the foregoing, in the case of any new Member Director subject to 
initial election or appointment pursuant to Section 1(b) of this 
Article V, such Director shall be added to a class, as determined by 
the Board at the time of such Director's initial election or 
appointment, and shall have an initial term expiring at the same time 
as the term of the class to which such Director has been added. In no 
case will any Member Director be added to a class that is already 
composed of two Member Directors [years or until a successor is elected 
and qualified].
    (c) The Independent Directors shall be divided into three classes, 
each initially composed of no more than two Independent Directors. Each 
Independent Director shall be selected for a term expiring at the third 
successive annual meeting of the membership or when such Director's 
successor is thereafter elected and qualified, and shall be identified 
as being of the same class as the Director such Director succeeds. 
Notwithstanding the foregoing, in the case of any new Independent 
Director subject to initial selection or appointment pursuant to 
Section 1(b) of this Article V, such Director shall be added to a 
class, as determined by the Board at the time of such Director's 
initial selection or appointment, and shall have an initial term 
expiring at the same time as the term of the class to which such 
Director has been added.
    [(b)] (d) The term of a CBOE Director shall be one year or until a 
successor is elected and qualified.
    2.2. Candidate Selection
    (a) The [three] candidates for election to the Board [either] as 
[Designated Dealer Directors or as At-Large] Member Directors shall be 
selected by the Nominating Committee. The Committee shall select at 
least one candidate for the position to be voted upon. An additional 
candidate or candidates may be nominated by a petition signed by ten 
percent or more of the Proprietary Members and delivered to the 
Secretary of the Exchange, provided that such candidate or candidates 
conforms to the requirements for the open position(s). There shall be 
an annual election [on the second Monday of January of each year (if 
such day is a legal holiday, then on the next business day)] during the 
annual meeting of the membership, at which only Proprietary Members can 
vote.
    (b) The Independent Directors shall be selected by means of the 
following process. The Nominating Committee shall select, after receipt 
of input from interested parties, the candidate(s) to be submitted to 
the Board for approval or disapproval at the first Board meeting 
following the annual membership meeting.
    [(b)] (c) The [four] CBOE Directors [members or executive officers 
of CBOE member organizations] shall be elected to the Board by the CBOE 
Board of Directors at their January meeting or as soon thereafter as 
possible.
    [(c) The three Public Directors shall be selected by means of the 
following process. The Exchange's Chairman shall submit a name or names 
of a candidate(s) to the Nominating Committee. The Nominating Committee 
shall approve the candidate(s) to be submitted to the Board for 
approval or disapproval at the first Board meeting following the annual 
membership meeting.]
* * * * *

ARTICLE VI. Committees

Section 1. Establishment of Committees
* * * * *
    1.4. Selection of Members
    The membership of such committees shall be chosen in such a way as 
to assure fair representation of the public and, as appropriate, all 
classes of members in the administration of the Exchange. Each 
committee shall be comprised of at least three persons [members, at 
least one of whom shall be a member of the Board, except that all 
members of the Executive Committee, if any, shall be members of the 
Board].
* * * * *

[[Page 33241]]

Section 3. Special Provisions Relating to Certain Committees
    3.1. Securities Committee
    [(a) The Securities Committee shall have as members at least one 
Proprietary Member with a certificate and at least one representative 
of issuers and investors who is not associated with a member or a 
broker or dealer. Notwithstanding anything in these By-Laws to the 
contrary, from the effective date of this provision of these By-Laws to 
the first Board meeting in 1989, the members of the Securities 
Committee shall be those members appointed to the Committee as of the 
effective date of this provision of the By-Laws.
    (b)] The Securities Committee shall have the authority to adopt 
operating procedures necessary and appropriate for the Exchange's 
automated interface with the Intermarket Trading System (ITS). The 
Securities Committee also may delegate its authority in Rule 11.9 to 
approve Designated Dealers and Designated Issues to an officer of the 
Exchange.
* * * * *

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

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of, and basis for, the proposal and discussed 
any comments it received on the proposed rule change, as amended. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
Sections A, B, and C below, of the most significant aspects of such 
statements.

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

1. Purpose
    On November 14, 1986, NSX and CBOE entered into an agreement of 
affiliation pursuant to which CBOE held 162 certificates of proprietary 
membership in NSX, and CBOE and its members had certain rights 
associated with NSX.\5\ NSX and CBOE have recently taken steps to 
terminate or amend certain aspects of their affiliation and, in 
connection therewith, CBOE has agreed to transfer certain of its 
certificates 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 a termination of 
rights agreement entered into between NSX and CBOE on September 27, 
2004 (the ``Termination Agreement'').
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    \5\ See Securities Exchange Act Release No. 24090 (February 12, 
1987), 52 FR 5225 (February 19, 1987)(order approving proposed rule 
change by the Cincinnati Stock Exchange relating to an affiliation 
with CBOE).
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    One of the conditions to the initial closing of the Termination 
Agreement called for amendments to the NSX By-Laws to eliminate the 
right of CBOE members to become NSX members without purchasing 
membership certificates, and thus the elimination of the ``CBOE 
Exerciser Member'' membership class,\6\ the elimination of the 
Exchange's Special Nominating Committee, and the removal of certain 
special limitations on changes to certain By-Laws and Rules. These 
changes were approved by the Commission on January 13, 2005.\7\
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    \6\ As part of the 1986 affiliation agreement between the 
Exchange and CBOE, the Exchange's By-Laws had been amended to 
provide that CBOE members were eligible to become Proprietary 
Members of NSX without having to purchase and own a certificate of 
proprietary membership, provided that each such CBOE member met all 
other eligibility requirements for NSX membership. This class of NSX 
membership was known as ``Proprietary Members without certificates'' 
and these NSX members were commonly referred to as ``CBOE Exerciser 
Members.''
    \7\ In eliminating the ``CBOE Exerciser Member'' class of 
membership, a ninety day transition period was provided for whereby 
any CBOE Exerciser Members existing on the effective date, January 
13, 2005 (the ``Effective Date''), will have ninety days from the 
Effective Date (which is April 13, 2005) to purchase a certificate 
of proprietary membership. During the ninety day period, a CBOE 
Exerciser Member who has not purchased a certificate shall have the 
rights and obligations of a Proprietary Member without certificate 
as those rights and obligations existed prior to the Effective Date. 
At the conclusion of the ninety day period, any CBOE Exerciser 
Member who does not own a certificate shall automatically cease to 
qualify for membership on the Exchange and may not again become a 
member of the Exchange without first complying with all the 
procedures and requirements set forth in the NSX By-Laws and Rules.
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    On January 18, 2005, the initial closing under the Termination 
Agreement took place. As part of that closing, NSX paid CBOE cash 
consideration in exchange for the relinquishment of three of CBOE's six 
NSX Board positions and other rights, as well as the transfer of a 
number certificates of proprietary membership to the Exchange. The 
Termination Agreement also anticipates subsequent closings or events 
whereby NSX shall pay CBOE cash and/or other consideration in exchange 
for the relinquishment of the remainder of CBOE's three NSX Board 
positions and other rights, as well as the transfer of additional 
certificates of proprietary membership to the Exchange.
    As a result of the relinquishment of the three NSX Board positions 
by CBOE and in anticipation of future relinquishments of NSX Board 
positions pursuant to the terms of the Termination Agreement, revisions 
to the NSX By-Laws are necessary to describe changes to the composition 
of the Board respecting those positions. The Exchange is also proposing 
additional revisions to its Board composition requirements to include a 
new category of directors known as ``Independent Directors.'' This 
category will replace the current ``Public Directors'' category. The 
Exchange is also proposing to provide a transition schedule for making 
a majority of its thirteen member Board be Independent Directors. These 
independence-related revisions are being proposed to comport with 
industry trends and in anticipation of governance requirements that the 
Commission may be imposing upon self-regulatory organizations.\8\ 
Various other related changes to the composition of the Board and its 
committees, which are described below, are also being proposed. The 
specific changes being proposed are described below.
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    \8\ To the extent that the proposed rule change, as amended, 
runs counter to the Commission's recent governance and transparency 
proposals, Securities Exchange Act Release No. 50699 (November 18, 
2004), 69 CFR 71125 (December 8, 2004), NSX represents that upon 
adoption of final rulemaking it will conform its By-laws 
accordingly. Telephone conversation among Jennifer M. Lamie, 
Assistant General Counsel & Secretary, NSX and Geraldine Idrizi, 
Attorney, Division of Market Regulation, Commission, on May 23, 
2005.
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a. Board Composition, Terms and Candidate Selection
    Immediately preceding the initial closing date under the 
Termination Agreement, the Board consisted of thirteen Directors: (A) 
The NSX President; (B) two Designated Dealer Directors; (C) an At-Large 
Member Director; (D) the CBOE Chairman, the CBOE President and four 
CBOE Member Directors (collectively referred to as the six ``CBOE 
Directors''); and (E) three Public Directors.\9\ The composition of the 
Board is proposed to be revised to consist of the following Directors: 
the NSX Chief Executive Officer; three Member Directors; six 
Independent Directors; and three CBOE Directors.
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    \9\ The current members of the Board are David Colker (NSX 
President); Peter B. Madoff and Cameron Smith (Designated Dealer 
Directors); Antoine C. Kemper, Jr. (At-Large Member Director); James 
M. Anderson, J. Carter Beese and Donald L. Calvin (Public 
Directors); and William J. Brodsky, Mark F. Duffy and Gary P. Lahey 
(CBOE Directors). As discussed elsewhere, there are also three 
vacant CBOE Director positions.
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    In sum, the Exchange is proposing to: (A) Change the position 
reserved for the President of the Exchange in favor of the

[[Page 33242]]

NSX's Chief Executive Officer;\10\ (B) combine the two Designated 
Dealer and one At-Large Member positions into a single ``Member 
Director'' category, which would be defined in proposed Article V, 
Section 1(a)(ii) of the NSX By-Laws as ``Proprietary Members or 
executive officers of Proprietary Member organizations;'' (C) eliminate 
the existing Public Director \11\ category in favor of an ``Independent 
Director'' category, which would be defined in proposed Article I, 
Section 1(k) of the NSX By-Laws as ``a member of the Board that the 
Board has determined to have no material relationship with the Exchange 
or any affiliate of the Exchange, any member of the Exchange or any 
affiliate of any such member, other than as a member of the Board'' and 
increased from three to six positions; and (D) combine the CBOE 
Chairman, CBOE President and CBOE Member Director categories into a 
single ``CBOE Director'' category, which would be defined in proposed 
Article V, Section 1(a)(iv) of the NSX By-Laws as ``executive officers 
of CBOE, CBOE members or executive officers of CBOE member 
organizations'' and decreased from six to three positions. 
Corresponding references throughout the NSX By-Laws are proposed to be 
amended accordingly.
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    \10\ The President and Chief Executive Officer are currently the 
same person.
    \11\ ``Public Directors'' are defined as ``representatives of 
issuers and investors who shall not be associated with any member of 
the Exchange or with any registered broker or dealer or with another 
self-regulatory organization, other than as a public trustee or 
director[.]'' Article V, Section 1.1(g) of the NSX By-Laws.
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    The ten Directors now serving on the Board shall remain and their 
current terms shall continue unchanged.\12\ As determined by the Board, 
the three new Independent Directors (who will be replacing the three 
CBOE Director positions that were vacated as part of the initial 
closing) will be either (i) selected in accordance with the applicable 
candidate selection processes set out in proposed Sections 2.1 and 2.2 
of Article V of the NSX By-Laws (described below), except that each 
candidate will be submitted by the Nominating Committee to the Board 
for approval or disapproval as soon as practical rather than following 
the annual membership meeting; or (ii) appointed in accordance with 
proposed Section 2.1 of the NSX By-Laws and the procedures for filling 
intraterm vacancies set out in Section 3 of Article V of the NSX By-
Laws (collectively referred to hereinafter as the ``New Director 
Selection Procedures''). The initial terms of the three new Independent 
Directors shall be staggered to expire at the same times as the current 
terms of the three existing Independent Directors in accordance with 
proposed Article V, Section 2.1(c) of the NSX By-Laws.
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    \12\ The members of the Board immediately following approved of 
the proposed revisions will be David Colker (NSX Chief Executive 
Officer); Antoine J. Kemper, Jr., Peter B. Madoff and Cameron Smith 
(Member Directors); James M. Anderson, J. Carter Beese and Donald L. 
Calvin (Independent Directors); and William J. Brodsky, Mark F. 
Duffy and Gary P. Lahey (CBOE Directors). There will also be three 
new Independent Directors selected in accordance with Article V, 
Section 2.2 of the NSX By-Laws.
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    The terms of office for the four categories of Director described 
in Article V, Section 2.1 of the NSX By-Laws will remain for the most 
part unchanged. The Chief Executive Officer's board term shall expire 
when such individual ceases to be Chief Executive Officer, each Member 
Director and Independent Director will be appointed for a three-year 
term or until a successor is thereafter elected and qualified, and each 
CBOE Director will be appointed for a one-year term or until a 
successor is elected and qualified. Modifications to provisions 
regarding Directors' terms of office are, however, being proposed to 
add procedures to account for when new Member Directors' and new 
Independent Directors' initial terms would begin.
    The candidate selection process described in Article V, Section 2.2 
of the NSX By-Laws will be modified as follows. The procedures for the 
election of Member Director candidates are proposed to be modified to 
clarify the language and existing Exchange practice that the annual 
election, at which Proprietary Members vote for the candidate(s), 
occurs during the annual meeting of the membership, which occurs in 
January in accordance with Article II, Section 10.1 of the NSX By-Laws. 
Reference to the procedures for the selection of Public Directors will 
be deleted and the proposed procedures for the selection of Independent 
Directors will be added to provide that the Nominating Committee shall 
select, after receipt of input from interested parties, the 
candidate(s) to be submitted to the Board for approval or disapproval 
at the first Board meeting following the annual membership meeting. The 
CBOE Directors shall continue to be elected to the NSX Board by the 
CBOE's board of directors at their January meeting or as soon 
thereafter as possible.

b. Subsequent Changes in Board Composition
    The Termination Agreement anticipates subsequent closings or events 
whereby NSX shall pay CBOE cash and/or other consideration in exchange 
for the relinquishment of the reminder of CBOE's three NSX Board 
positions and other rights, as well as the transfer of additional 
certificates of proprietary membership to the Exchange. The Exchange is 
therefore proposing to adopt additional provisions to accommodate the 
resultant changes in composition to the Board that would occur upon 
such closing(s) and in order to achieve a majority of Independent 
Directors serving on the Board should there be no subsequent closings. 
These provisions will be reflected in proposed Article V, Section 1(b) 
of the NSX By-Laws and would provide:
     On the date of the first ``Subsequent Closing''\13\ to 
occur after January 18, 2005, the number of positions on the Board to 
be filled by CBOE Directors shall be reduced from three to two and the 
number of positions to be filled by Independent Directors shall be 
increased from six to seven. Following the first Subsequent Closing, a 
new Independent Director shall be selected, as determined by the Board, 
pursuant to the New Director Section Procedures.
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    \13\ ``Subsequent Closing'' would be defined in proposed Article 
V, Section 1(b)(vii) of the NSX By-Laws to have meaning given to it 
in the Termination Agreement.
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     If no Subsequent Closing has occurred prior to February 
15, 2006, then in order to achieve a majority of Independent Directors 
serving on the Board, the Board may, in its discretion, add up to two 
new Independent Directors and thereby increase the number of Directors 
serving on the Board from thirteen to not more than fifteen. In such 
event, the two new Independent Directors shall be selected, as 
determined by the Board, pursuant to the New Director Selection 
Procedures.
     On the date of the second Subsequent Closing to occur 
after January 18, 2005, the number of positions on the Board to be 
filled by CBOE Directors will be reduced from two to one, and the Board 
may, in its discretion, increase by one the number of positions to be 
filled by either Independent Directors or Member Directors. Following 
the second Subsequent Closing, a new Director may be selected, as 
determined by the Board, pursuant to the New Director Selection 
Procedures.

[[Page 33243]]

     On the earliest to occur of (A) the date on which CBOE 
owns less than five percent (5%) of the outstanding certificates of 
proprietary membership of the Exchange or (B) the third anniversary of 
the fourth Subsequent Closing (the earliest of these to occur being the 
``CBOE Withdrawal Date''), the number of positions on the Board to be 
filled by CBOE Directors shall be reduced from one to zero, and the 
Board may, in its discretion, increase by one the number of positions 
to be filled by either Independent Directors or Member Directors. The 
remaining CBOE Director shall be deemed to have resigned from the Board 
as of the CBOE Withdrawal Date. Following the CBOE Withdrawal Date, a 
new Director may be selected, as determined by the Board, pursuant to 
the New Director Selection Procedures.
c. Changes in Committee Composition
    In order to comport with industry practice and anticipated changes 
in regulatory requirements, the Exchange is proposing to revise the 
general composition requirements for committees contained in Article 
VI, Section 1.4 of the NSX By-Laws to provide that membership of such 
committees shall be chosen in such a way to assure fair representation 
of the public and, as appropriate, all classes of members. The Exchange 
is also proposing to delete references in: (i) Article VI, Section 1.4 
of the NSX By-Laws to the requirements that at least one member of each 
committee be a member of the Board and that all members of the 
Executive Committee be members of the Board, and (ii) Article VI, 
Section 3.1 of the NSX By-Laws to the requirements that the Securities 
Committee have at least one Proprietary Member and at least one 
representative of issuers and investors who is not associated with a 
member or a broker or dealer, and composition requirements that were no 
longer applicable after 1989.
d. Definition Changes
    As indicated above, the Exchange is proposing to adopt a definition 
for ``Independent Director.'' The Exchange is also proposing to modify 
the definition of ``CBOE member(s)'' to delete reference to the 
requirement, in the case of a transferable regular CBOE membership that 
is subject to a lease agreement, that the lessee and not the lessor be 
deemed to the CBOE member. Finally, the Exchange is proposing to 
reorganize the list of definitions in alphabetical order and renumber 
the provisions accordingly.
2. Statutory Basis
    The Exchange believes the proposed rule change, as amended, is 
consistent with Section 6(b) of the Act\14\ in general, and furthers 
the objectives of Section 6(b)(5)\15\ in particular, in that it is 
designed to promote just and equitable principles of trade and to 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system and, generally, in that it protects 
investors and the public interest. The Exchange believes that the 
proposed rule change, as amended, also furthers the objectives of 
Section 6(b)(1),\16\ in that it helps to assure that the Exchange is so 
organized and has 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.
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    \14\ 15 U.S.C. 78f(b).
    \15\ 15 U.S.C. 78f(b)(5).
    \16\ 15 U.S.C. 78f(b)(1).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change, as 
amended, will impose any inappropriate burden on competition.

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

    No written comments were solicited or received in connection with 
the proposed rule change, as amended.

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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission will:
    (a) By order approve such proposed rule change, as amended; or
    (b) institute proceedings to determine whether the proposed rule 
change, as amended, should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, is consistent with the Act. 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-NSX-2005-02 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-NSX-2005-02. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, 
all written statements with respect to the proposed rule change, as 
amended, that are filed with the Commission, and all written 
communications relating to the proposed rule change, as amended, 
between the Commission and any person, other than those that may be 
withheld from the public in accordance with the provisions of 5 U.S.C. 
552, will be available for inspection and copying in the Commission's 
Public Reference Room. Copies of such filing also will be available for 
inspection and copying at the principal office of NSX. All comments 
received will be posted without change; the Commission does not edit 
personal identifying information from submissions. You should submit 
only information that you wish to make available publicly. All 
submissions should refer to File Number SR-NSX-2005-02 and should be 
submitted on or before June 28, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-2892 Filed 6-6-05; 8:45 am]
BILLING CODE 8010-01-P