[Federal Register Volume 70, Number 136 (Monday, July 18, 2005)]
[Notices]
[Pages 41248-41249]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-3787]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52007; File No. SR-NSX-2005-02]


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

July 11, 2005.
    On March 31, 2005, the National Stock Exchange (the ``Exchange'' or 
``NSX'') 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 to make modifications to the 
composition of its Board of Directors (``Board'') and committees. 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 proposed rule change, as amended, was 
published for comment in the Federal Register on June 7, 2005.\5\ The 
Commission received no comments on the proposal.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 replaced the original filing in its 
entirety.
    \4\ In Amendment No. 2, the Exchange revised the proposed 
definition of ``Independent Director.''
    \5\ See Securities Exchange Act Release No. 51765 (May 31, 
2005), 70 FR 33238.
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    In connection with a termination of rights agreement (``Termination 
Agreement'') entered into between NSX and the Chicago Board Options 
Exchange, Incorporated (``CBOE'') on September 27, 2004, and in order 
to conform to recent industry trends and comply with regulatory 
requirements that the Commission may impose upon self-regulatory 
organizations, the Exchange proposed various changes to its By-Laws. 
The Exchange proposed the following changes relating to Board 
composition, terms of office and candidate selection: (A) Change the 
position on the Board reserved for the President of the Exchange in 
favor of the NSX's Chief Executive Officer;\6\ (B) combine the two 
Designated Dealer and one At-Large Member positions on the Board 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,'' and which 
would continue to consist of three positions; (C) modify the Member 
Director candidate selection process described in Article V, Section 
2.2 of the NSX By-Laws to clarify that the annual election, at which 
Proprietary Members vote for the candidate(s), occurs during the annual 
meeting of the membership, which is in January; (D) eliminate the 
existing Public Director \7\ 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 
increase the number of such directors from three to six positions; (E) 
delete provisions relating to the procedure for selecting Public 
Directors and replace such provisions with the procedure for selecting 
Independent Directors; (F) combine the CBOE Chairman, CBOE President 
and CBOE Member Director positions on the Board 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 
decrease the number of such directors from six to three positions; (G) 
modify the definition of ``CBOE member(s)'' to delete 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 
be the CBOE member and reorganize the list of definitions in 
alphabetical order and renumber the provisions accordingly; and (H) 
modify the provisions relating to Directors' terms of office to, among 
other things, add procedures to account for when new Member Directors' 
and new Independent Directors' initial terms would begin.
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    \6\ The President and Chief Executive Officer are currently the 
same person.
    \7\ ``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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    Further, the Exchange proposed to adopt provisions to accommodate 
future Board composition changes, which would achieve a Board comprised 
of a majority of Independent Directors, resulting from subsequent 
closings under the Termination Agreement.
    Finally, the Exchange proposed to revise the general composition 
requirements for committees contained in Article VI, Section 1.4 of the 
NSX By-Laws to provide that the membership of such committees would be 
chosen in such a way as to assure the fair representation of the public 
and, as appropriate, all classes of members, and to delete references 
in: (a) 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 (b) 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 certain other 
composition requirements that are no longer applicable.
    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange \8\ and, in 
particular, the requirements of Section 6(b) of the Act \9\ and the 
rules and regulations thereunder. The Commission finds specifically 
that the proposed rule change is consistent with Section 6(b)(5) of the 
Act \10\ in particular, which requires, among other things, that the 
rules of an 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 and Section 
6(b)(1) of the Act,\11\ which requires that an Exchange 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.
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    \8\ In approving this proposed rule change, the Commission notes 
that it has considered the proposed rule's impact on efficiency, 
competition, and capital formation. 15 U.S.C. 78c(f).
    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
    \11\ 15 U.S.C. 78f(b)(1).
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    The Commission notes that the proposal is designed to implement

[[Page 41249]]

changes made necessary by the terms of the Termination Agreement. These 
changes, in part, result from the relinquishment by CBOE of its three 
NSX Board positions, as well as, CBOE's anticipated relinquishment of 
additional NSX Board positions. The Commission further notes that the 
revisions relating to Exchange governance, such as the creation of a 
new category of directors known as ``Independent Directors,'' the 
implementation of a transition schedule for having a majority of NSX's 
thirteen member Board consist of Independent Directors, and the various 
changes to the composition of NSX's committees, are being made in 
anticipation of certain governance requirements that the Commission may 
impose upon self-regulatory organizations. The Commission believes that 
a Board consisting of a majority of independent directors should help 
address the conflicts of interest that otherwise may arise when persons 
with a relationship to the Exchange are involved in key decisions, and 
should increase the likelihood that the Board will act in accordance 
with the mandates of the Act and in the best interests not only of the 
Exchange but also investors.
    Therefore, in the Commission's view, the proposal 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) 
\12\ and 6(b)(5) \13\ of the Act.
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    \12\ 12 15 U.S.C. 78f(b)(1).
    \13\ 13 15 U.S.C. 78f(b)(5).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\14\ that the proposed rule change (SR-NSX-2005-02) be, and hereby 
is, approved.
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    \14\ 14 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. E5-3787 Filed 7-15-05; 8:45 am]
BILLING CODE 8010-01-P