[Federal Register Volume 70, Number 188 (Thursday, September 29, 2005)]
[Notices]
[Pages 56949-56961]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-5314]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52497; File No. SR-PCX-2005-90]


Self-Regulatory Organizations; Pacific Exchange, Inc.; Order 
Granting Approval of Proposed Rule Change and Amendment No. 1 Thereto 
and Notice of Filing and Order Granting Accelerated Approval to 
Amendment No. 2 to the Proposed Rule Change To Amend the Certificate of 
Incorporation of PCX Holdings, Inc., PCX Rules, and the Bylaws of 
Archipelago Holdings, Inc. in Relation to the Acquisition of PCX 
Holdings by Archipelago Holdings

September 22, 2005.

I. Introduction

    On August 1, 2005, the Pacific Exchange, Inc. (``PCX'' or the 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934, as amended (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend the certificate of 
incorporation of PCX Holdings, Inc. (``PCXH''), the PCX rules, and the 
bylaws of Archipelago Holdings, Inc. (``Archipelago'') in relation to 
the acquisition of PCXH by Archipelago. On August 10, 2005, the 
Exchange filed Amendment No. 1 to the proposed rule change. The 
proposed rule change, as amended, was published for comment in the 
Federal Register on August 18, 2005.\3\ The Commission received one 
comment on the proposal.\4\ On September 16, 2005, the Exchange filed 
Amendment No. 2 (``Amendment No. 2'') to the proposed rule change.\5\ 
This order approves the proposed rule change, grants accelerated 
approval to Amendment No. 2 to the proposed rule change, and solicits 
comments from interested persons on Amendment No. 2.
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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. 52249 (August 12, 
2005), 70 FR 48611 (``Notice'').
    \4\ See electronic mail sent to the Division of Enforcement and 
the Division of Market Regulation on September 13, 2005 from ``A 
Concerned Stakeholder.''
    \5\ In Amendment No. 2, the Exchange: (1) Revised its Form 19b-4 
to reflect actions by the stockholders of PCXH approving the Merger 
Agreement (as defined below) on September 13, 2005, thereby 
completing the last necessary corporate action; (2) made certain 
technical, non-substantive corrections to the text of the proposed 
rule change; (3) clarified the scope of the term ``real-time market 
surveillance'' in its discussion of the scope of the regulatory 
agreement between PCX and NASD pursuant to Rule 17d-2 under the Act; 
(4) clarified the relationship between Archipelago and Wave 
Securities, L.L.C. (``Wave''); Archipelago and Terra Nova Trading, 
L.L.C. (``Terra Nova''); Terra Nova and TAL Financial Services, LLC 
(``TAL''); and Archipelago and White Cap Trading LLC (``White Cap'') 
in relation to its requests for exceptions from PCXH's ownership and 
voting limitations included in the Notice; (5) provided that the 
temporary exception it requested for Wave in the Notice would be 
subject to a condition that Archipelago continue to maintain and 
comply with its existing information barriers; (6) included a 
request for a temporary exception from the PCXH ownership and voting 
requirements for the ``inbound routing'' function of its wholly 
owned subsidiary Archipelago Trading Services, Inc. (``Arca 
Trading'') and the related clearing function performed by 
Archipelago Securities, L.L.C. (``Archipelago Securities''), subject 
to certain conditions; (7) requested an exception on a 60-day pilot 
basis for Archipelago to continue to own and operate an alternative 
trading system (``ATS'') for the trading of over-the-counter 
bulletin board securities not traded on any exchange; (8) requested 
an exception on a pilot basis until the earlier of (a) 60 days and 
(b) the closing of the pending merger between Archipelago and the 
New York Stock Exchange, Inc. (``NYSE'') for Archipelago to be able 
to continue to own and operate, through Archipelago Securities, a 
service that provides direct connectivity to the NYSE through DOT 
access; and (9) requested accelerated approval of Amendment No. 2.
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II. Description of the Proposal

    On January 3, 2005, PCXH, Archipelago and New Apple Acquisitions 
Corporation (``Merger Sub''), a newly formed wholly owned subsidiary of 
Archipelago, entered into an Agreement and Plan of Merger,\6\

[[Page 56950]]

pursuant to which Archipelago agreed to acquire PCXH and all of PCXH's 
wholly owned subsidiaries, including PCX and PCX's equities business 
subsidiary, PCX Equities, Inc. (``PCXE''), by way of a merger under 
Delaware law of the Merger Sub with and into PCXH, with PCXH as the 
surviving corporation (the ``Merger'').\7\ The purpose of the proposed 
rule change is to amend the certificate of incorporation of PCXH 
(``Certificate of Incorporation of PCXH''), certain rules of the PCX, 
and the bylaws of Archipelago (``Archipelago Bylaws'') to facilitate 
the consummation of the Merger.
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    \6\ On July 22, 2005, PCXH, Archipelago and Merger Sub amended 
and restated the Original Merger Agreement (the agreement, as so 
amended, is referred to herein as the ``Merger Agreement'').
    \7\ The closing of the Merger is referred to herein as the 
``Effective Time'' of the Merger.
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A. Corporate Structure and Governance

    PCXH, as the surviving corporation in the Merger, will become a 
direct, wholly owned subsidiary of Archipelago (the post-Merger PCXH is 
referred to herein as the ``New PCXH''). The Certificate of 
Incorporation of PCXH as in effect immediately prior to the Effective 
Time will be amended pursuant to the Merger Agreement, as described in 
this proposed rule change, and as so amended will be the certificate of 
incorporation of the New PCXH. The bylaws of PCXH as in effect 
immediately prior to the Effective Time will be the bylaws of the New 
PCXH. The directors of the Merger Sub at the Effective Time will become 
directors of the New PCXH and the officers of PCXH at the Effective 
Time will become officers of the New PCXH.
    As represented by PCX in the Notice, except as described in the 
Notice or otherwise approved by the Commission, the Merger will not 
affect the internal corporate structure of PCXH or the regulatory 
relationship of PCX and PCXE to Archipelago Exchange, L.L.C. 
(``ArcaEx''), the exclusive equities trading facility of PCX and PCXE. 
PCX will remain a wholly owned subsidiary of the New PCXH, will 
continue operating the options business of the Exchange, and will 
retain the self-regulatory organization responsibility for the options 
business and for PCX's equities business subsidiary, PCXE. ArcaEx will 
remain the exclusive equities trading facility of PCX and PCXE and the 
Amended and Restated Facility Services Agreement among Archipelago, PCX 
and PCXE, dated as of March 22, 2002, which currently governs the 
regulatory relationship of PCX and PCXE to ArcaEx (the ``FSA''), will 
remain in full force and effect in its current form. Except as 
otherwise discussed herein, PCXE's operations, governance structure, or 
rules will not be affected by the Merger. After the Merger, the board 
of directors of PCX and PCXE will continue to meet the compositional 
requirements set forth in the certificate of incorporation and bylaws 
of PCX and PCXE.

B. Self-Regulatory Function of PCX and Regulatory Jurisdiction Over 
Archipelago

    Certain provisions of Archipelago's current certificate of 
incorporation (``Certificate of Incorporation of Archipelago'') are 
designed to facilitate the ability of PCX, PCXE, and the Commission to 
fulfill their regulatory and oversight obligations under the Act.\8\ 
All but one of these provisions remain applicable only for so long as 
ArcaEx remains a facility (as defined in Section 3(a)(2) of the Act) 
\9\ of PCX and PCXE and the FSA remains in full force and effect. PCX 
represents that following completion of the Merger, ArcaEx will remain 
the exclusive equities trading facility of PCX and PCXE, and the FSA 
will remain in full force and effect in its current form. In order to 
assure, however, the continued force and effect of these provisions in 
the event of any change in the relationship of PCX and PCXE to ArcaEx 
or the effectiveness of the FSA after completion of the Merger, PCX 
proposes to amend the Archipelago Bylaws to provide that Archipelago 
will not take any action, and will not permit any of its subsidiaries 
(which will include PCXH, PCX, and PCXE, as well as ArcaEx) to take any 
action that will cause (i) ArcaEx to cease to be a facility of PCX and 
PCXE, or (ii) the FSA to cease to be in full force and effect, unless 
each provision in the Certificate of Incorporation of Archipelago that 
is subject to the limitation described above is amended to provide that 
such provision shall remain in full force and effect whether or not 
ArcaEx remains a facility of PCX and PCXE or the FSA is in full force 
and effect.\10\
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    \8\ See Sections IV.A and IV.D of Securities Exchange Act 
Release No. 50170 (August 9, 2004), 69 FR 50419 (August 16, 2004) 
(order approving a proposed rule change in connection with the 
initial public offering of Archipelago) (``August 2004 Order''). 
These provisions include paragraphs (C)(3)(y), (D)(2), (D)(2)(a) and 
(H)(3) of Article Fourth, the third paragraph of Article EIGHTH, the 
penultimate paragraph of Article TENTH, and Articles THIRTEENTH, 
FOURTEENTH, FIFTEENTH, SIXTEENTH, SEVENTEENTH, EIGHTEENTH and 
NINETEENTH of the Certificate of Incorporation of Archipelago. See 
also Section 6.8(b) of the Archipelago Bylaws.
    \9\ 15 U.S.C. 78c(a)(2).
    \10\ Archipelago Bylaws, Proposed Section 6.8(c). The foregoing 
bylaw provision may not be amended, modified or repealed unless such 
amendment, modification or repeal is (i) filed with and approved by 
the Commission or (ii) approved by Archipelago stockholders voting 
not less than 80% of the then outstanding votes entitled to be cast 
in favor of any such amendment, modification or repeal. Archipelago 
Bylaws, Proposed Section 6.8(g). In addition, the Archipelago Bylaws 
will continue to provide that before any amendment to the bylaws 
shall be effective, such amendment shall be submitted to the Board 
of Directors of PCX and if such Board shall determine that the same 
is required, under Section 19 of the Act and the rules promulgated 
thereunder, to be filed with, or filed with and approved by, the 
Commission before such amendment may be effective under Section 19 
of the Act and the rules promulgated thereunder, then such amendment 
shall not be effective until filed with, or filed with and approved 
by, the Commission, as the case may be. Archipelago Bylaws, Proposed 
Section 6.8(b).
    PCX also proposes to amend Section 6.8(b) of the Archipelago 
Bylaws to eliminate the restriction that the provision applies only 
for so long as ArcaEx remains a facility of PCX and PCXE and the FSA 
is in full force and effect.
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    In addition, certain provisions of the current Certificate of 
Incorporation of Archipelago apply only to the extent that their 
requirements relate to ArcaEx.\11\ Following completion of the Merger, 
PCX and PCXE will become wholly owned subsidiaries of Archipelago. To 
also apply these provisions to the operations of PCX and PCXE, PCX 
proposes to amend the Archipelago Bylaws to provide that:\12\
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    \11\ Certificate of Incorporation of Archipelago, Article 
THIRTEENTH (relating to the submission by Archipelago and its 
officers, directors, and certain employees to the jurisdiction of 
the United States federal courts, the Commission, and PCX for 
matters arising out of or relating to the activities of ArcaEx); 
Article FOURTEENTH (providing for the inspection and copying by PCX 
and PCXE of Archipelago's books and records as they relate to the 
operation and administration of ArcaEx as a facility of PCX and 
PCXE); Article SEVENTEENTH (requiring Archipelago to take reasonable 
steps necessary to cause its agents to cooperate with PCX and PCXE 
with respect to such agents' activities related to ArcaEx); and 
Article EIGHTEENTH (requiring that Archipelago cause its officers, 
directors, and employees to consent to the applicability to them of 
certain provisions of the Certificate of Incorporation of 
Archipelago in connection with their activities related to ArcaEx).
    \12\ The following proposed bylaw provisions may not be amended, 
modified or repealed unless such amendment, modification or repeal 
is (i) filed with and approved by the Commission or (ii) approved by 
Archipelago stockholders voting not less than 80% of the then 
outstanding votes entitled to be cast in favor of any such 
amendment, modification or repeal. Archipelago Bylaws, Proposed 
Section 6.8(g).
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     Archipelago's books and records shall be subject at all 
times to inspection and copying by PCX and PCXE to the extent such 
books and records are related to the operation and administration of 
PCX or PCXE; \13\
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    \13\ Archipelago Bylaws, Proposed Section 6.8(e)(i).
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     Archipelago shall take reasonable steps necessary to cause 
its agents to cooperate with PCX and PCXE pursuant to their regulatory 
authority with

[[Page 56951]]

respect to such agents' activities related to PCX or PCXE; \14\
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    \14\ Archipelago Bylaws, Proposed Section 6.8(e)(ii).
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     Archipelago shall take reasonable steps necessary to cause 
its officers, directors and employees prior to accepting a position as 
an officer, director or employee, as applicable, of Archipelago to 
consent in writing to the applicability to them of certain specified 
provisions of the Certificate of Incorporation of Archipelago with 
respect to their activities related to PCX or PCXE; \15\ and
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    \15\ Archipelago Bylaws, Proposed Section 6.8(e)(iii).
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     Archipelago, its directors and officers, and those of its 
employees whose principal place of business and residence is outside 
the United States, shall be deemed to irrevocably submit to the 
exclusive jurisdiction of the United States Federal courts, the 
Commission and PCX for the purposes of any suit, action or proceeding 
pursuant to the United States Federal securities laws, and the rules 
and regulations thereunder, arising out of, or relating to, the 
activities of PCX or PCXE, and Archipelago and each such director, 
officer or employee, in the case of any such director, officer or 
employee by virtue of his acceptance of any such position, shall be 
deemed to waive, and agree not to assert by way of motion, as a defense 
or otherwise in any suit, action or proceeding, any claims that it or 
they are not personally subject to the jurisdiction of the Commission, 
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.\16\
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    \16\ Archipelago Bylaws, Proposed Section 6.8(e)(iv). 
Archipelago undertakes to take reasonable steps necessary to cause 
Archipelago's directors and officers and those Archipelago employees 
whose principal place of business and residence is outside the 
United States prior to accepting a position as an officer, director 
or employee, as applicable, of Archipelago to consent in writing to 
the applicability to them of this provision. Archipelago also 
undertakes that it will take reasonable steps necessary to cause 
Archipelago's current directors and officers and those current 
Archipelago employees whose principal place of business and 
residence is outside the United States to consent in writing prior 
to the consummation of the Merger to the applicability to them of 
this provision. See Notice, supra note 3.
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    In addition, Archipelago represents in the Notice that, prior to 
the earlier of (1) the 2006 annual general meeting of Archipelago 
stockholders and (2) the first meeting of Archipelago stockholders to 
occur after the closing of the Merger (other than any meeting or 
meetings of Archipelago stockholders convened for the purpose of 
considering and approving the merger of Archipelago and the NYSE), that 
its board of directors will: (a) Propose amendments to the Certificate 
of Incorporation of Archipelago to (i) extend the application of voting 
and ownership limitations imposed on ETP Holders currently contained in 
the Certificate of Incorporation of Archipelago to OTP Holders and OTP 
Firms; (ii) delete the phrase ``[f]or so long as ArcaEx remains a 
Facility of PCX and PCXE and the FSA remains in full force and effect'' 
from each paragraph that contains such language; \17\ and (iii) 
incorporate amendments to the provisions of the Certificate of 
Incorporation of Archipelago that are currently limited to activities 
of ArcaEx to cover activities of PCX and PCXE, as noted above; \18\ (b) 
declare the advisability of such amendments; and (c) direct such 
amendments be submitted for stockholder approval at the earlier of (1) 
the 2006 annual meeting of Archipelago stockholders and (2) the first 
meeting of Archipelago stockholders to occur after the closing of the 
Merger (other than any meeting or meetings of Archipelago stockholders 
convened for the purpose of considering and approving the merger of 
Archipelago and the NYSE).\19\
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    \17\ Paragraphs (C)(3)(y), (D)(2), (D)(2)(a) and (H)(3) of 
Article FOURTH, the third paragraph of Article EIGHTH, the 
penultimate paragraph of Article TENTH, Article THIRTEENTH, Article 
FOURTEENTH, Article FIFTEENTH, Article SIXTEENTH, Article 
SEVENTEENTH and Article NINETEENTH of the Certificate of 
Incorporation of Archipelago include this language.
    \18\ Articles THIRTEENTH, FOURTEENTH, SEVENTEENTH AND EIGHTEENTH 
of the Certificate of Incorporation of Archipelago would need to be 
so amended. See supra notes 13 to 16 and accompanying text.
    \19\ See Notice, supra note 3.
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C. Change of Control of PCX; Voting and Ownership Limitations

    The current Certificate of Incorporation of PCXH provides that (1) 
no person (``Person'') \20\ either alone or together with its related 
persons (``Related Persons''),\21\ may own shares constituting more 
than 40% of the outstanding shares of capital stock of PCXH,\22\ and 
(2) no trading permit holder of PCX or equities trading permit holder 
of PCXE, either alone or together with its Related Persons, may own 
shares constituting more than 20% of the outstanding shares of capital 
stock of PCXH.\23\ In addition, the Certificate of Incorporation of 
PCXH provides that no Person, either alone of together with its Related 
Persons, may vote, possess the right to vote or cause the voting of 
shares representing more than 20% of the issued and outstanding capital 
stock of PCXH, and also places limitations on the ability of any 
person, either alone or together with its Related Persons, to enter 
into an agreement with respect to the withholding of any vote or 
proxy.\24\
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    \20\ Certificate of Incorporation of PCXH, Article Nine, Section 
1(b)(iv), defines ``person'' as an individual, partnership (general 
or limited), joint stock company, corporation, limited liability 
company, trust or unincorporated organization, or any governmental 
entity or agency or political subdivision thereof.
    \21\ Certificate of Incorporation of PCXH, Article Nine, Section 
1(b)(iv), defines ``related person'' to be (1) with respect to any 
person, all ``affiliates'' and ``associates'' of such person (as 
such terms are defined in Rule 12b-2 under the Act); (2) with 
respect to any person constituting a trading permit holder of PCX or 
an equities trading permit holder of PCXE, any broker dealer with 
which such holder is associated; and (3) any two or more persons 
that have any agreement, arrangement or understanding (whether or 
not in writing) to act together for the purpose of acquiring, 
voting, holding or disposing of shares of the capital stock of PCXH.
    \22\ Certificate of Incorporation of PCXH, Article Nine, Section 
1(b)(i). Such restriction may be waived by the board of directors of 
PCXH pursuant to an amendment to the Bylaws of PCXH adopted by the 
board after making certain findings and following certain procedures 
as described in more detail in the Notice, supra note 3, and in 
Securities Exchange Act Release No. 49718 (May 17, 2004), 69 FR 
29611 (May 24, 2004) (the ``May 2004 Order''). Certificate of 
Incorporation of PCXH, Article Nine, Sections 1(b)(i)(B) and 
1(b)(i)(C).
    \23\ Certificate of Incorporation of PCXH, Article Nine, Section 
1(b)(ii). There is no provision allowing the board to waive this 
restriction.
    \24\ Certificate of Incorporation of PCXH, Article Nine, Section 
1(c). These restrictions were approved in connection with the 2004 
demutualization of PCXH. See May 2004 Order, supra note 22, for a 
more detailed discussion of the current restrictions in the 
Certificate of Incorporation of PCXH.
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1. Exceptions to PCXH Ownership and Voting Restrictions
    As a result of the Merger, Archipelago will own 100% of the capital 
stock of PCXH. Thus, absent an exception, Archipelago and its Related 
Persons, some of which are ETP Holders, would exceed these ownership 
and voting limitations in violation of the current Certificate of 
Incorporation of PCXH. The proposed rule change therefore would amend 
the Certificate of Incorporation of PCXH to create an exception to the 
voting and ownership limitations for Archipelago and certain Related 
Persons of Archipelago to permit Archipelago to own 100% of the capital 
stock of PCXH.\25\
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    \25\ Certificate of Incorporation of PCXH, Proposed Article 
Nine, Section 4.
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    In particular, the proposed rule change would add a new paragraph 
at the end of Article Nine of the Certificate of Incorporation of PCXH 
that would provide that, for so long as Archipelago directly owns all 
of the outstanding capital stock of PCXH, the provisions of Article 
Nine, including the ownership

[[Page 56952]]

and voting limitations with respect to shares of PCXH capital stock, 
would not be applicable to the voting and ownership of shares of PCXH 
capital stock by (1) Archipelago, (2) any person that is a Related 
Person of Archipelago, either alone or together with its related 
persons, and (3) any other person to which Archipelago is a Related 
Person, either alone or together with its Related Persons. These 
exceptions to the ownership and voting limitations, however, would not 
apply to ``prohibited persons.'' \26\
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    \26\ Id.
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    ``Prohibited persons'' would be defined to mean any person that is, 
or that has a related person that is (1) an OTP Holder or an OTP Firm 
(as such terms are defined in the rules of PCX, as such rules may be in 
effect from time to time) \27\ or (2) an ETP Holder (as such term is 
defined in the rules of PCX, as such rules may be in effect from time 
to time),\28\ except: (A) any broker or dealer approved by the 
Commission after June 20, 2005 to be a facility (as defined in Section 
3(a)(2) of the Act) \29\ of PCX; (B) any person that has been approved 
by the Commission prior to it becoming subject to the provisions of 
Article Nine of the Certificate of Incorporation of PCXH with respect 
to the voting and ownership of shares of PCXH capital stock by such 
person; and (C) any person that is a related person of Archipelago 
solely by reason of beneficially owning, either alone or together with 
its Related Persons, less than 20% of the outstanding shares of 
Archipelago capital stock (any person covered by (A) through (C) is 
referred to as a ``permitted person'' in proposed Section 4 of Article 
Nine of the Certificate of Incorporation of PCXH).\30\ The proposed 
Section 4 of Article Nine of the Certificate of Incorporation of PCXH 
would further provide that any other prohibited person not covered by 
the definition of a permitted person who would be subject to and exceed 
the voting and ownership limitations imposed by Article Nine as of the 
date of the closing of the Merger would be permitted to exceed the 
voting and ownership limitations imposed by Article Nine only to the 
extent and for the time period approved by the Commission.\31\
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    \27\ PCX Rule 1.1(q) defines an ``OTP Holder'' to mean any 
natural person, in good standing, who has been issued an Options 
Trading Permit (``OTP'') by the Exchange for effecting approved 
securities transactions on the Exchange's trading facilities, or has 
been named as a Nominee. PCX Rule 1.1(n) defines a ``Nominee'' to 
mean an individual who is authorized by an ``OTP Firm'' (a sole 
proprietorship, partnership, corporation, limited liability company 
or other organization in good standing who holds an OTP or upon whom 
an individual OTP Holder has conferred trading privileges on the 
Exchange's trading facilities) to conduct business on the Exchange's 
trading facilities and to represent such OTP Firm in all matters 
relating to the Exchange.
    \28\ PCXE Rule 1.1(n) defines an ``ETP Holder'' to mean any sole 
proprietorship, partnership, corporation, limited liability company 
or other organization in good standing that has been issued an 
Equity Trading Permit, a permit issued by the PCXE for effecting 
approved securities transactions on the trading facilities of PCXE.
    \29\ Section 3(a)(2) defines the term ``facility,'' when used 
with respect to an exchange, to include its premises, tangible or 
intangible property whether on the premises or not, any right to the 
use of such premises or property or any service thereof for the 
purpose of effecting or reporting a transaction on an exchange 
(including, among other things, any system of communication to or 
from the exchange, by ticker or otherwise, maintained by or with the 
consent of the exchange), and any right of the exchange to the use 
of any property or service. 15 U.S.C. 78c(a)(2)
    \30\ Certificate of Incorporation of PCXH, Proposed Article 
Nine, Section 4.
    \31\ Id.
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a. Outbound Router
    Archipelago Securities is a registered broker-dealer, a member of 
the National Association of Securities Dealers, Inc. (``NASD''), and an 
ETP Holder. Archipelago Securities currently provides an optional 
routing service for ArcaEx to route orders to other securities 
exchanges, facilities of securities exchanges, automated trading 
systems, electronic communications networks or other brokers or dealers 
(collectively, ``Market Centers'') from ArcaEx in compliance with PCXE 
rules (such function of Archipelago Securities is referred to as the 
``Outbound Router''). In its capacity as an Outbound Router, 
Archipelago Securities operates and is regulated as a facility of 
PCX.\32\ As such, the Outbound Router function of Archipelago 
Securities is subject to PCX's and the Commission's continuing 
oversight. In particular, PCX is responsible for filing with the 
Commission rule changes and fees relating to the Outbound Router 
function, and for ensuring that the Outbound Router complies with the 
requirement not to unfairly discriminate.\33\ Archipelago intends to 
continue to own and operate Archipelago Securities following the 
closing of the Merger. The proposed operation of Archipelago Securities 
as an Outbound Router after the closing of the Merger will not change 
from the way it is administered and operated today.\34\
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    \32\ Archipelago Securities was approved by the Commission to 
operate as a facility of PCXE on October 25, 2001 in connection with 
the Commission's approval of the rules of PCX establishing ArcaEx as 
a facility of PCXE. See Securities Exchange Act Release No. 44983 
(October 25, 2001), 66 FR 55225 (November 1, 2001) (the ``Original 
Outbound Router Release''). The name of the order routing broker-
dealer was originally Wave Securities, L.L.C. as approved by the 
Commission in the Original Outbound Router Release.
    \33\ See, e.g., Section 6(b)(5) of the Act, 15 U.S.C. 78f(b)(5).
    \34\ As an Outbound Router, Archipelago Securities will continue 
to receive instructions from ArcaEx, route orders to other Market 
Centers in accordance with those instructions and be responsible for 
reporting resulting executions back to ArcaEx. In addition, all 
orders routed through Archipelago Securities would remain subject to 
the terms and conditions of PCXE rules. See Notice, supra note 3, 
and Original Outbound Router Release, supra note 32, at 55233-55235 
(describing the operation of the order routing broker-dealer 
approved by the Commission).
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    After the closing of the Merger, Archipelago's continued ownership 
of Archipelago Securities would cause Archipelago Securities to exceed 
the ownership and voting limitations contained in Article Nine of the 
Certificate of Incorporation of PCXH (because Archipelago Securities is 
an ETP Holder and a Related Person of Archipelago), absent an 
exception. Pursuant to the proposed exception in proposed Article Nine, 
Section 4 of the Certificate of Incorporation of PCXH for a Related 
Person of Archipelago that is a broker or dealer approved by the 
Commission after June 20, 2005 to be a facility of PCX, PCX has 
proposed that the Commission approve Archipelago Securities, a wholly 
owned subsidiary of Archipelago, to be a facility (as defined in 
Section 3(a)(2) of the Act) of PCX, subject to the following:
     PCX will continue to regulate the Outbound Router function 
of Archipelago Securities as a facility of the Exchange, subject to 
Section 6 of the Act.
     The NASD, a self-regulatory organization (``SRO'') 
unaffiliated with Archipelago or any of its affiliates, will continue 
to carry out oversight and enforcement responsibilities as the 
Designated Examining Authority (``DEA'') designated by the Commission 
pursuant to Rule 17d-1 of the Act with the responsibility for examining 
Archipelago Securities for compliance with the applicable financial 
responsibility rules.
     The agreement between the NASD and PCX currently in place 
pursuant to Rule 17d-2 under the Act \35\ (the ``NASD PCX Agreement'') 
will remain in full force and effect and PCX will continue to abide by 
the terms of such agreement. The NASD PCX Agreement allocates to

[[Page 56953]]

the NASD the responsibility to receive regulatory reports from 
Archipelago Securities, to examine Archipelago Securities for 
compliance and to enforce compliance by Archipelago Securities with the 
Act, the rules and regulations thereunder and the rules of the NASD, 
and to carry out other specified regulatory functions with respect to 
Archipelago Securities.
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    \35\ Rule 17d-2 provides that any two or more SROs may file with 
the Commission a plan for allocating among such SROs the 
responsibility to receive regulatory reports from persons who are 
members or participants of more than one of such SROs to examine 
such persons for compliance, or to enforce compliance by such 
persons, with specified provisions of the Act, the rules and 
regulations thereunder, and the rules of such SROs, or to carry out 
other specified regulatory functions with respect to such persons. 
17 CFR 240.17d-2.
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     PCX will amend the NASD PCX Agreement within 90 days of 
the Commission's approval of this proposed rule change \36\ to expand 
the scope of the NASD's regulatory functions so as to encompass all of 
the regulatory oversight and enforcement responsibilities with respect 
to Archipelago Securities pursuant to applicable laws, except for real-
time market surveillance.\37\
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    \36\ See Amendment No. 2.
    \37\ In Amendment No. 2, PCX clarified that ``real-time market 
surveillance'' means marketplace regulation and marketplace 
surveillance, including surveillance and enforcement related to PCXE 
trading rules, PCX and PCXE rules relating to trading on ArcaEx, and 
Commission rules relating to trading.
---------------------------------------------------------------------------

     An ETP Holder's use of Archipelago Securities to route 
orders to another Market Center from ArcaEx will continue to be 
optional. Any ETP Holder that does not want to use Archipelago 
Securities may use other routers to route orders to other Market 
Centers.\38\
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    \38\ An ETP Holder may chose to route an order to ArcaEx that, 
if not executable on ArcaEx, will be cancelled and returned to the 
ETP Holder, at which time the ETP Holder could chose to route the 
order to another market.
    Those ETP Holders who choose to use the Outbound Router function 
provided by Archipelago Securities must sign an Archipelago 
Securities Routing Agreement. Importantly, among other things, the 
Archipelago Securities Routing Agreement provides that all orders 
routed through Archipelago Securities are subject to the terms and 
conditions of PCXE rules. See Archipelago Securities Routing 
Agreement, http://www.tradearca.com/exchange/pdfs/ETPApplication.pdf 
(as of September 20, 2005).
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     Archipelago Securities will not engage in any business 
other than its Outbound Router function (including, in that function, 
the self-clearing functions that it currently performs for trades with 
respect to orders routed to other Market Centers) and other activities 
approved by the Commission.
b. Inbound Router
    As noted above in this Section II.C.1., the proposed rule change 
includes an exception to the ownership and voting restrictions in the 
Certificate of Incorporation of PCXH to allow any Related Person of 
Archipelago that is a prohibited person not covered by the definition 
of a permitted person to exceed these voting and ownership limitations 
only to the extent and for the time period approved by the 
Commission.\39\ Archipelago wholly owns and operates two other ETP 
Holders, Wave and Arca Trading.\40\ Wave acts as an introducing broker 
for institutional customers to provide access to ArcaEx and other 
market centers.\41\ Arca Trading acts as an introducing broker for non-
ETP Holder broker-dealer customers for securities traded on ArcaEx 
(individually and collectively, the ``Inbound Router functions'').\42\ 
In addition, Archipelago Securities provides clearing functions for 
trades executed by the Inbound Router function of Arca Trading.
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    \39\ Certificate of Incorporation of PCXH, Proposed Article 
Nine, Section 4.
    \40\ Each of Wave and Arca Trading is a wholly owned subsidiary 
of Archipelago, an ETP Holder, and a member of the NASD. See 
Amendment No. 2.
    \41\ See Amendment No. 2.
    \42\ Id.
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    As a wholly owned subsidiary of Archipelago, each of Wave and Arca 
Trading is a Related Person of Archipelago, and thus Archipelago's 
ownership of PCXH, absent an exception, would cause Wave and Arca 
Trading, as ETP Holders, to exceed the voting and ownership limitations 
imposed by Article Nine of the Certificate of Incorporation of PCXH. 
PCX requests the Commission's approval of a temporary exception for (1) 
Arca Trading and Archipelago Securities, with respect to the Inbound 
Router function of Arca Trading and the related clearing function of 
Archipelago Securities, and (2) for Wave to permit them to exceed the 
voting and ownership limitations imposed by Article Nine of the 
Certificate of Incorporation of PCXH (as proposed to be amended as 
described in this filing) to the following extent and for the following 
time periods:
     Archipelago may, until December 31, 2005, continue to own 
Wave provided Archipelago continues to maintain and comply with its 
current information barriers between Wave on the one hand and PCX, 
PCXE, and other subsidiaries of Archipelago that are facilities of PCX 
or PCXE on the other hand.\43\
---------------------------------------------------------------------------

    \43\ PCX clarified in Amendment No. 2 that the request for a 
temporary exception for Wave is subject to this condition.
---------------------------------------------------------------------------

     Archipelago may, until the earlier of March 31, 2006 and 
the closing date of the proposed merger of Archipelago and the NYSE, 
continue to own and operate the Inbound Router function of Arca Trading 
and the related clearing function of Archipelago Securities following 
the closing of its acquisition of PCXH provided that: (1) The revenues 
derived by Archipelago from the Inbound Router function of Arca Trading 
do not exceed 7% of the consolidated revenues of Archipelago 
(determined on a quarterly basis); (2) the Inbound Router function of 
Arca Trading does not accept any new clients following the closing of 
the Merger; and (3) Archipelago continues to maintain and comply with 
its current information barriers between the Inbound Router function of 
Arca Trading on the one hand and PCX, PCXE, and other subsidiaries of 
Archipelago that are facilities of PCX or PCXE on the other hand.\44\
---------------------------------------------------------------------------

    \44\ See Amendment No. 2. The Commission also notes that each of 
Wave, Arca Trading and Arca Securities are covered by the NASD PCX 
Agreement, see Amendment No.2 and supra Section II.C.1.a, and that 
the NASD is the DEA for each.
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c. Other ETP Holders That Are ``Related Persons'' of Archipelago
    PCX requests the Commission's approval of a temporary exception for 
Terra Nova so that Terra Nova may be permitted to exceed the voting and 
ownership limitations imposed by Article Nine of the Certificate of 
Incorporation of PCXH (as proposed to be amended as described in this 
filing) to the following extent and for the following time periods:
     Gerald D. Putnam, Chairman and Chief Executive Officer 
(``CEO'') of Archipelago, may, until December 31, 2005, continue to 
beneficially own in excess of 5% of Terra Nova and continue to serve as 
a director of TAL following the closing of the Merger notwithstanding 
the terms of the Certificate of Incorporation of PCXH, as proposed to 
be amended as described in this filing.\45\
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    \45\ Terra Nova is an ETP Holder and a wholly owned subsidiary 
of TAL. Archipelago's ownership of PCXH would cause Terra Nova, as 
an ETP Holder, to exceed the ownership and voting limitations 
imposed by Article Nine of the Certificate of Incorporation of PCXH 
(as proposed to be amended) as of the date of the closing of the 
Merger, by virtue of Mr. Putnam's beneficial ownership in excess of 
5% of Terra Nova and his service as a director of TAL. See Amendment 
No. 2. PCX clarified that Mr. Putnam's ownership of Terra Nova is 
beneficial, not direct. Terra Nova is a wholly owned subsidiary of 
TAL and Mr. Putnam owns 40% of TAL. Telephone conversation between 
Kathryn Beck, General Counsel, PCX and Jennifer Dodd, Special 
Counsel, Division of Market Regulation (``Division''), Commission, 
on September 20, 2005.
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    Also, to abide by the terms of the Certificate of Incorporation of 
PCXH, as proposed to be amended as described in this filing, Kevin J.P. 
O'Hara, Chief Administrative Officer and General Counsel of 
Archipelago, and Paul Adcock, Managing Director, Trading, of

[[Page 56954]]

Archipelago, shall resign from the board of directors of White Cap 
prior to the Effective Time.\46\
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    \46\ White Cap is an ETP Holder and a Related Person of 
Archipelago by virtue of Messrs. O'Hara and Adcock's services as 
directors of White Cap. See Amendment No. 2.
---------------------------------------------------------------------------

    In addition to its Inbound Router services, Arca Trading operates 
an alternative trading system (``ATS''), as defined in Rule 300 of 
Regulation ATS under the Act,\47\ for trading in over-the-counter 
bulletin board securities that are not traded on any securities 
exchange (the ``ATS OTC function'').\48\ Archipelago Securities also 
engages in the business of providing broker-dealer clients with direct 
connectivity to the NYSE, through the NYSE's Designated Order 
Turnaround system (the ``DOT function'').\49\ PCX requests the 
Commission's approval of an exception for Arca Trading and Archipelago 
Securities from the voting and ownership limitations of Article Nine of 
the Certificate of Incorporation of PCXH (as proposed to be amended as 
described in this filing) to the following extent and for the following 
time periods:
---------------------------------------------------------------------------

    \47\ 17 CFR 242.300.
    \48\ See Amendment No. 2. Archipelago Securities provides 
clearing functions for trades executed on this ATS, and PCX 
requested an exception for this clearing function in the Notice.
    \49\ This service is separate from Archipelago Securities' 
Outbound Router function and is not included within the request for 
an exception for the Outbound Router function described in Section 
II.C.1.a. above. See Amendment No. 2.
---------------------------------------------------------------------------

     Archipelago may continue to own the ATS OTC function of 
Arca Trading for a period of 60 days following the closing of the 
Merger; \50\ and
---------------------------------------------------------------------------

    \50\ See Amendment No. 2.
---------------------------------------------------------------------------

     Archipelago may own the DOT function of Archipelago 
Securities until the earlier of (1) a period of 60 days following the 
closing of the Merger, and (2) the closing date of the proposed merger 
of Archipelago and the NYSE.\51\
---------------------------------------------------------------------------

    \51\ Id.
---------------------------------------------------------------------------

2. Ownership and Voting Restrictions on Archipelago Stockholders
    The Certificate of Incorporation of Archipelago contains similar 
ownership and voting restrictions with respect to Archipelago stock as 
those imposed on PCXH stockholders under the Certificate of 
Incorporation of PCXH. These provisions are intended to ensure that the 
ownership of Archipelago by the public will not unduly interfere with 
or restrict the ability of the Commission or PCX to effectively carry 
out their regulatory oversight responsibilities under the Act, with 
respect to ArcaEx, and generally to enable ArcaEx to operate in a 
manner that complies with the Federal securities laws, including 
furthering the objectives of Section 6(b)(5) of the Act.\52\
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    \52\ These restrictions were approved by the Commission in 
connection with Archipelago's initial public offering in 2004. See 
August 2004 Order, supra note 8.
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    Specifically, (1) no person,\53\ either alone or together with its 
related persons,\54\ shall be permitted at any time to own beneficially 
shares of Archipelago stock representing in the aggregate more than 40% 
of the then outstanding votes entitled to be cast on any matter,\55\ 
and (2) for long as ArcaEx is a facility of PCX and PCXE and the FSA is 
in effect,\56\ no ETP Holder, either alone or with its related persons, 
shall be permitted at any time to own beneficially shares of 
Archipelago stock representing in the aggregate more than 20% of the 
then outstanding votes entitled to be cast on any matter.\57\ In 
addition, no person, either alone or with its related persons, may (1) 
vote or cause the voting of shares of stock of Archipelago to the 
extent such shares represent in the aggregate more than 20% of the then 
outstanding votes entitled to be cast on any matter (``Archipelago 
Certificate Voting Limitation''), or (2) enter into any agreement, plan 
or arrangement not to vote shares, the effect of which agreement, plan 
or arrangement would be to enable any person, either alone or with its 
related persons, to vote or cause the voting of shares that would 
represent in the aggregate more that 20% of the then outstanding votes 
entitled to be cast on any matter (``Archipelago Certificate Non-Voting 
Agreement Prohibition'').\58\
---------------------------------------------------------------------------

    \53\ Person means a natural person, company, government, or 
political subdivision, agency, or instrumentality of a government. 
Certificate of Incorporation of Archipelago, Article FOURTH, Section 
H(2).
    \54\ Related Persons is defined in Article FOURTH, Section H(3) 
of the Certificate of Incorporation of Archipelago.
    \55\ Such restriction may be waived by the board of directors of 
Archipelago after making certain findings and following certain 
procedures as described in more detail in Article FOURTH, Section 
D(1) of the Certificate of Incorporation of Archipelago.
    \56\ PCX proposes to amend the Archipelago Bylaws to provide 
that Archipelago will not take any action, and will not permit any 
of its subsidiaries to take any action that will cause (i) ArcaEx to 
cease to be a facility of PCX and PCXE, or (ii) the FSA to cease to 
be in full force and effect, unless each provision in the 
Certificate of Incorporation of Archipelago that is subject to this 
limitation, including this provision, is amended to provide that 
such provision shall remain in full force and effect whether or not 
ArcaEx remains a facility of PCX and PCXE or the FSA is in full 
force and effect. Archipelago also undertakes that its board of 
directors will propose, and declare the advisability of, and submit 
to shareholders certain amendments to its certificate to extend the 
ownership and voting limitations to all PCX members and to delete 
this limiting language. See supra notes 17 to 19 and accompanying 
text.
    \57\ Certificate of Incorporation of Archipelago, Section D(2) 
of Article FOURTH. The Certificate of Incorporation of Archipelago 
does not have any provisions that would permit the Board of 
Archipelago to waive the 20% limitation relating to any ETP Holders. 
In addition, if an ETP Holder, either alone or together with its 
related persons, owns beneficially shares of stock of Archipelago in 
excess of this 20% limitation, Archipelago would be required to call 
from such ETP Holder and its related persons that number of shares 
of stock entitled to vote that exceed the 20% limitation at a price 
equal to par value of the shares of stock. Certificate of 
Incorporation of Archipelago, Section D(2).
    \58\ Certificate of Incorporation of Archipelago, Sections C of 
Article FOURTH.
---------------------------------------------------------------------------

    Because Archipelago would own PCXH, and thus PCX, after the Merger, 
the proposed PCX rules would extend the ownership restriction in 
Archipelago's Certificate of Incorporation to PCX members other than 
ETP Holders. The proposed PCX rules would provide that for as long as 
Archipelago controls, directly or indirectly, PCX, no OTP Holder or OTP 
Firm, either alone or with its related persons,\59\ shall own 
beneficially shares of Archipelago stock representing in the aggregate 
more than 20% of the then outstanding votes entitled to be cast on any 
matter (the ``Ownership Limitation'').\60\
---------------------------------------------------------------------------

    \59\ ``Related persons'' would be defined in proposed PCX Rule 
1.1(gg).
    \60\ Proposed PCX Rule 3.4(a).
---------------------------------------------------------------------------

    In addition to this Ownership Limitation, the proposed PCX rules 
provide that for as long as Archipelago shall control, directly or 
indirectly, PCX, no OTP Holder or OTP Firm, either alone or together 
with its related persons, shall (1) have the right to vote, vote or 
cause the voting of shares of stock of Archipelago to the extent such 
shares represent in the aggregate more than 20% of the then outstanding 
votes entitled to be cast on any matter (the ``Voting Limitation'') or 
(2) enter into any agreement, plan or arrangement not to vote shares, 
the effect of which agreement, plan or arrangement would be to enable 
any person, either alone or with its related persons, to vote or cause 
the voting of shares that would represent in the aggregate more than 
20% of the then outstanding votes entitled to be cast on any matter 
(the ``Nonvoting Agreement Prohibition'').\61\
---------------------------------------------------------------------------

    \61\ Proposed PCX Rule 3.4(b). The Voting Limitation and 
Nonvoting Agreement Prohibition would not apply to (1) any 
solicitation of any revocable proxy from any stockholder of 
Archipelago by or on behalf of Archipelago or by an officer or 
director of Archipelago acting on behalf of Archipelago or (2) any 
solicitation of any revocable proxy from any stockholder of 
Archipelago by any other stockholder that is conducted pursuant to, 
and in accordance with, Regulation 14A promulgated pursuant to the 
Act. Id.

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[[Page 56955]]

    The proposed rules also would require OTP Holders, OTP Firms, and 
their ``associated persons'' (as such term is defined in Section 
3(a)(18) of the Act,\62\ and referred to as ``OTP Associates''), to 
enter into an agreement with PCX and Archipelago \63\ pursuant to which 
such OTP Holder, OTP Firm or OTP Associate would agree to comply with 
the ownership and voting limitations imposed by the proposed PCX 
rules,\64\ to authorize Archipelago to vote their shares of Archipelago 
stock in favor of amendments to the Certificate of Incorporation of 
Archipelago that incorporate such ownership and voting limitations,\65\ 
and to be subject to disciplinary action pursuant to the proposed PCX 
rules if they violate any of the ownership and voting limitations or 
fail to enter into such ownership and voting agreement (such agreement, 
the ``Ownership and Voting Agreement'').\66\ Under the proposed rules, 
failure to comply with the ownership and voting limitations or failure 
to enter into the Ownership and Voting Agreement in a timely manner 
would subject the responsible OTP Holder or OTP Firm to the suspension 
of all trading rights and privileges, unless such violation is 
cured.\67\
---------------------------------------------------------------------------

    \62\ 15 U.S.C. 78c(a)(18).
    \63\ Proposed PCX Rule 3.4(c) would require (1) a person who is 
an OTP Holder, OTP Firm or OTP Associate which is not an ETP Holder 
and which (x) owns beneficially any shares of Archipelago stock or 
(y) has entered into any agreement, plan or other arrangement 
relating to the voting or ownership of any shares of Archipelago 
stock, at the time of the closing of the Merger, to enter into the 
Ownership and Voting Agreement (as defined below) no later than 30 
calendar days following the date of closing of the Merger; and (2) a 
person who is any OTP Holder, OTP Firm or OTP Associate which is not 
required to enter into an Ownership and Voting Agreement pursuant to 
the above clause to enter into the Ownership and Voting Agreement no 
later than the fifth calendar day following the date on which: (x) 
such OTP Holder, OTP Firm or OTP Associate ceases being an ETP 
Holder and (A) owns or acquires beneficial ownership of any shares 
of Archipelago stock or (B) is a party to or enters into any 
agreement, plan or other arrangement relating to the voting or 
ownership of any shares of Archipelago stock; or (y) such OTP 
Holder, OTP Firm or OTP Associate which is not an ETP Holder (A) 
acquires beneficial ownership of any shares of Archipelago stock or 
(B) enters into any agreement, plan or other arrangement relating to 
the voting or ownership of any shares of Archipelago stock.
    \64\ Proposed PCX Rules 3.4(c)(1) and (c)(2).
    \65\ Proposed PCX Rule 3.4(c)(3).
    \66\ Proposed PCX Rule 3.4(d)(3).
    \67\ Proposed PCX Rule 13.2(a)(2)(E). Proposed PCX Rule 
13.2(a)(2)(E) would provide that in the event of any such failure to 
comply with proposed PCX Rule 3.4, PCX shall: (1) provide notice to 
the applicable OTP Holder or OTP Firm within five business days of 
learning of the failure to comply; (2) allow the applicable OTP 
Holder, OTP Firm or OTP Associate of such OTP Holder or OTP Firm 
fifteen calendar days to cure any such failure to comply; (3) in the 
event that the applicable OTP Holder, OTP Firm or OTP Associate of 
such OTP Holder or OTP Firm does not cure such failure to comply 
within such fifteen calendar day cure period, schedule a hearing to 
occur within thirty calendar days following the expiration of such 
fifteen calendar day cure period; and (4) render its decision as to 
the suspension of all trading rights and privileges of the 
applicable OTP Holder or OTP Firm no later than ten calendar days 
following the date of such hearing.
---------------------------------------------------------------------------

    In addition, the proposed rules would require that the Ownership 
and Voting Agreement contain provisions designed to provide a 
disincentive for OTP Holders and OTP Firms to exceed the ownership and 
voting limitations imposed by the PCX rules. Specifically, proposed PCX 
Rule 3.4(d) would provide that in the event that any OTP Holder or OTP 
Firm, either alone or with its related persons (including any related 
persons who are OTP Associates of such OTP Holder or OTP Firm), at any 
time owns beneficially shares of Archipelago stock in excess of the 
Ownership Limitation, Archipelago would be required to promptly call 
from such OTP Holder or OTP Firm, or an OTP Associate of such OTP 
Holder or OTP Firm, at a price per share equal to the par value 
thereof, shares of Archipelago stock owned by such OTP Holder, OTP Firm 
or OTP Associate that are necessary to decrease the beneficial 
ownership of such OTP Holder or OTP Firm, either alone or with its 
related persons, to 20% of the then outstanding votes entitled to be 
cast on any matter after giving effect to the redemption of the shares 
of Archipelago stock.\68\
---------------------------------------------------------------------------

    \68\ Proposed PCX Rule 3.4(d)(1). For additional details on the 
procedures for making such calls and on the formula for determining 
the number of shares to be called, see Notice, supra note 3.
---------------------------------------------------------------------------

    The proposed PCX rules and the Ownership and Voting Agreement also 
would provide that, if any OTP Holder or OTP Firm, either alone or with 
its related persons (including any related persons who are OTP 
Associates of such OTP Holder or OTP Firm), acquires the right to vote 
more than 20% of the then outstanding votes entitled to be cast by 
stockholders of Archipelago on any matter, Archipelago shall have the 
right to vote and shall vote such shares of Archipelago stock.\69\ In 
addition, the proposed PCX rules and the Ownership and Voting Agreement 
would provide that in the event any OTP Holder or OTP Firm, either 
alone or with its related persons (including any related person that is 
an OTP Associate of such OTP Holder or OTP Firm), has cast votes, in 
person or by proxy or through any voting agreement or other 
arrangement, in excess of the Voting Limitation, Archipelago may bring 
suit in a court of competent jurisdiction against such OTP Holder, OTP 
Firm or OTP Associates seeking enforcement of the Voting 
Limitation.\70\
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    \69\ Proposed PCX Rule 3.4(d)(2).
    \70\ Proposed PCX Rule 3.4(d)(4). The Commission notes that OTP 
Holders and OTP Firms are currently subject to the existing voting 
limitations contained in the Certificate of Incorporation of 
Archipelago that apply to any person. Certificate of Incorporation 
of Archipelago, Article FOURTH, Section C.
---------------------------------------------------------------------------

    Furthermore, the proposed PCX rules provide that in the event of 
any violation by any OTP Holder or OTP Firm of the Ownership 
Limitation, Voting Limitation or Nonvoting Agreement Prohibition 
(including, without limitation, any failure of an OTP Holder, OTP Firm 
or OTP Associate to enter into the Ownership and Voting Agreement 
within the applicable time periods), the Exchange shall suspend all 
trading rights and privileges of such OTP Holder or OTP Firm in 
accordance with proposed PCX Rule 13.2(a)(2)(E), subject to the 
procedures provided therein.\71\
---------------------------------------------------------------------------

    \71\ Proposed PCX Rule 3.4(d)(3).
---------------------------------------------------------------------------

    In addition, PCX proposes an amendment to the Archipelago Bylaws 
that would prohibit the board of directors of Archipelago from waiving 
the 40% ownership limitation, the Archipelago Certificate Voting 
Limitation or the Archipelago Certificate Non-Voting Agreement 
Prohibition for any OTP Holder, OTP Firm, or any of their related 
persons.\72\ The proposed amendments to the Archipelago Bylaws also 
would clarify that, should Archipelago call shares from certain of its 
stockholders in the event of breaches of certain ownership limitations 
pursuant to Archipelago's Certificate of Incorporation, the board of 
directors of Archipelago would cause Archipelago to call promptly 
shares of stock of Archipelago and also to give notice of such call 
promptly.\73\
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    \72\ Archipelago Bylaws, Proposed Section 6.8(d). See Article 
FOURTH, Section H(3) of the Certificate of Incorporation of 
Archipelago for the definition of ``related person.'' For additional 
details regarding this definition, see August 2004 Order, supra note 
8.
    \73\ Archipelago Bylaws, Proposed Section 6.8(f).
---------------------------------------------------------------------------

III. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 2, including whether Amendment No. 
2, 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

[[Page 56956]]

Number SR-PCX-2005-90 on the subject line.

Paper Comments:

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-9303.
    All submissions should refer to File Number SR-PCX-2005-90. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, 
all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. 552, will be available for inspection 
and copying in the Commission's Public Reference Room. Copies of such 
filing also will be available for inspection and copying at the 
principal office of PCX. 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 Amendment No. 
2 of File Number SR-PCX-2005-90 and should be submitted on or before 
October 20, 2005.

IV. Discussion of Commission Findings

    After careful review, the Commission finds that the proposed rule 
change, as amended, is consistent with the requirements of the Act and 
the rules and regulations thereunder applicable to a national 
securities exchange.\74\ In particular, the Commission finds that the 
proposal is consistent with Section 6(b)(1) of the Act,\75\ 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)(5) of the Act,\76\ 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.\77\
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    \74\ 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).
    \75\ 15 U.S.C. 78f(b)(1).
    \76\ 15 U.S.C. 78f(b)(5).
    \77\ 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 
restrictions on member ownership of an SRO or a facility of an SRO. 
See Securities Exchange Act Release No. 50699 (November 18, 2004), 
69 FR 71126 (December 8, 2004).
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    The Commission discusses below significant aspects of the proposed 
rule change.

A. Self-Regulatory Function of the Exchange; Relationship Between PCX 
and Archipelago; Jurisdiction Over Archipelago

    As represented by PCX, the Merger will not affect the internal 
corporate structure of PCXH or the regulatory relationship among PCX, 
PCXE, and ArcaEx, except as described in Section II.A above or 
otherwise approved by the Commission. PCX will continue operating the 
options business of the Exchange, and ArcaEx will remain the exclusive 
equities trading facility of PCX and PCXE (and the FSA will remain in 
full force and effect in its current form). PCX will continue to 
operate as a registered national securities exchange under Section 6 of 
the Act, and will retain the self-regulatory organization function. 
Except as otherwise discussed herein, PCXE's operations, governance 
structure, or rules will not be affected by the Merger. All persons 
using PCX or ArcaEx will continue to be subject to the Exchange's rules 
and PCX will maintain its current regulatory authority over its 
members. Although Archipelago and PCXH do not themselves carry out 
regulatory functions, their activities with respect to the operation of 
ArcaEx and options trading on PCX should be consistent, and not 
interfere, with PCX's self-regulatory obligations.
    Certain provisions in the Certificate of Incorporation and Bylaws 
of PCXH (as the owner of the Exchange) and Archipelago (as the owner 
and operator of the equities trading facility of the Exchange) are 
designed to maintain the independence of PCX's self-regulatory function 
and facilitate the ability of PCX, PCXE, and the Commission to fulfill 
their regulatory and oversight obligations under the Act.\78\ For 
example, PCXH and Archipelago consented to the Commission's 
jurisdiction with respect to activities relating to PCX, or ArcaEx, 
respectively, agreed to provide the Commission and PCX access to their 
books and records to the extent they relate to PCX or ArcaEx, 
respectively, and agreed to cooperate with the Commission and PCX 
pursuant to their regulatory authority.\79\ PCXH and Archipelago also 
agreed to keep confidential non-public information relating to PCX and 
not to use such information for any commercial purposes.\80\ In 
addition, the boards of directors of PCXH and Archipelago are required 
to explicitly consider in the performance of their duties PCX's 
regulatory obligations under the Act.\81\
---------------------------------------------------------------------------

    \78\ See Sections V.C and V.D of the May 2004 Order, supra note 
22, and Sections IV.A and IV.D of the August 2004 Order, supra note 
8.
    \79\ Bylaws of PCXH, Article 7, Sections 7.03, 7.04 and 7.05 and 
Certificate of Incorporation of Archipelago, Articles THIRTEENTH, 
FOURTEENTH and SIXTEENTH.
    \80\ Bylaws of PCXH, Article 3, Section 3.15 and Certificate of 
Incorporation of Archipelago, Article FOURTEENTH.
    \81\ Bylaws of PCXH, Article 3, Section 3.15 and Certificate of 
Incorporation of Archipelago, Article TENTH.
---------------------------------------------------------------------------

    Because Archipelago will become the sole stockholder and the parent 
of PCXH as a result of the Merger, and thus the owner of the Exchange 
in addition to the equities trading facility of the Exchange, the 
Commission continues to believe that such provisions are appropriate. 
Certain of these provisions in the Certificate of Incorporation of 
Archipelago and the Archipelago Bylaws, however, currently apply only 
with respect to activities related to ArcaEx, or only so long as ArcaEx 
remains the exclusive equities trading facility of PCX and the FSA 
remains in full force and effect.\82\ To assure the continued force and 
effect of these provisions after Archipelago acquires the Exchange, 
even if there is a change in the relationship of PCX and PCXE to ArcaEx 
or the effectiveness of the FSA after completion of the Merger, PCX 
proposes to amend the Archipelago Bylaws to expand the application of 
these provisions to activities related to PCX and PCXE.\83\ In 
addition, PCX proposes to amend the Archipelago Bylaws to provide that 
Archipelago will not take any action, and will not permit any of its 
subsidiaries (which will include PCXH, PCX, and PCXE, as well

[[Page 56957]]

as ArcaEx) to take any action that will cause (i) ArcaEx to cease to be 
a facility of PCX and PCXE, or (ii) the FSA to cease to be in full 
force and effect, unless each provision in the Certificate of 
Incorporation of Archipelago that is subject to the limitations 
described above is amended to provide that such provision shall remain 
in full force and effect whether or not ArcaEx remains a facility of 
PCX and PCXE or the FSA is in full force and effect.\84\
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    \82\ See supra notes 8 and 11 and accompanying text.
    \83\ See supra notes 12 to 16 and accompanying text.
    \84\ Archipelago Bylaws, Proposed Section 6.8(c). See supra 
notes 9 to 10 and accompanying text.
---------------------------------------------------------------------------

    In addition, as noted above in Section II.B, Archipelago represents 
that, prior to the earlier of (1) the 2006 annual general meeting of 
Archipelago stockholders and (2) the first meeting of Archipelago 
stockholders to occur after the closing of the Merger (other than any 
meeting or meetings of Archipelago stockholders convened for the 
purpose of considering and approving the merger of Archipelago and the 
NYSE), that its board of directors will: (a) Propose amendments to the 
Certificate of Incorporation of Archipelago to (i) delete the phrase 
``[f]or so long as ArcaEx remains a Facility of PCX and PCXE and the 
FSA remains in full force and effect'' from each paragraph that 
contains such language, and (ii) incorporate amendments to the 
provisions of the Certificate of Archipelago that are currently limited 
to activities of ArcaEx to cover activities of PCX and PCXE, as noted 
above; \85\ (b) declare the advisability of such amendments; and (c) 
direct such amendments be submitted for stockholder approval at the 
earlier of (1) the 2006 annual meeting of Archipelago stockholders and 
(2) the first meeting of Archipelago stockholders to occur after the 
closing of the Merger (other than any meeting or meetings of 
Archipelago stockholders convened for the purpose of considering and 
approving the merger of Archipelago and the NYSE).\86\
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    \85\ Articles THIRTEENTH, FOURTEENTH, SEVENTEENTH AND EIGHTEENTH 
of the Certificate of Incorporation of Archipelago would need to be 
so amended.
    \86\ See Notice, supra note 3.
---------------------------------------------------------------------------

    These amendments to the Archipelago Bylaws, coupled with the 
undertakings of Archipelago, are designed to maintain the independence 
of PCX's self-regulatory function and generally to enable the Exchange 
to operate in a manner that complies with the federal securities laws, 
including furthering the objectives of Sections 6(b) and 19(g) of the 
Act,\87\ as well as to facilitate the ability of the Commission to 
exercise appropriate oversight over the Exchange and its controlling 
persons. The Commission believes that these provisions are appropriate 
and consistent with the Act.
---------------------------------------------------------------------------

    \87\ 15 U.S.C. 78f(b) and 78s(g).
---------------------------------------------------------------------------

    The Commission believes that, even in the absence of these proposed 
amendments and undertakings, Section 20(a) of the Act \88\ provides 
that any person with a controlling interest in Archipelago would be 
jointly and severally liable with and to the same extent that 
Archipelago 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 \89\ 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 \90\ 
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.
---------------------------------------------------------------------------

    \88\ 15 U.S.C. 78t(a).
    \89\ 15 U.S.C. 78t(e).
    \90\ 15 U.S.C. 78u-3.
---------------------------------------------------------------------------

B. Change of Control of PCX; Ownership and Voting Limitations

1. Limited Exception To Allow Archipelago To Acquire PCXH
    As noted above, the Certificate of Incorporation of PCXH currently 
contains provisions that impose limitations on direct and indirect 
changes in control of PCXH that are designed to prevent any 
shareholder, or any shareholders acting together, from exercising undue 
control over the operations of the Exchange and to ensure that PCX, 
PCXE, and the Commission are able to carry out their regulatory 
obligations under the Act. These provisions include a separate, 
heightened ownership restriction on any member of PCX.\91\ As a result 
of the Merger, Archipelago will own 100% of the capital stock of PCXH, 
which would violate the ownership and voting limitations in the current 
Certificate of Incorporation of PCXH, absent an exception.\92\ Thus, to 
permit Archipelago to acquire PCXH, PCX has requested that the 
Commission approve a limited exception from the ownership and voting 
restrictions in PCXH's Certificate of Incorporation for Archipelago and 
its Related Persons, other than Related Persons that are ``prohibited 
persons'' (i.e., PCX members) and that are not ``permitted persons'' or 
affirmatively approved by the Commission.\93\
---------------------------------------------------------------------------

    \91\ See supra notes 22 to 24 and accompanying text, and Section 
V.B of the May 2004 Order, supra note 22.
    \92\ Certificate of Incorporation of PCXH, Proposed Article 
Nine, Section 4.
    \93\ Certificate of Incorporation of PCXH, Proposed Article 
Nine, Section 4. See supra notes 27 to 31 and accompanying text for 
a detailed definition of ``prohibited person'' and ``permitted 
person.''
---------------------------------------------------------------------------

    Stockholders of Archipelago currently are subject to ownership and 
voting restrictions substantially similar to those imposed on PCXH 
stockholders.\94\ The heightened restrictions on members of PCX, 
however, are not analogous, because the ownership restrictions 
contained in the Certificate of Incorporation of Archipelago that 
impose heightened restrictions on PCX members apply only to ETP 
Holders.\95\ These heightened restrictions on ETP Holders were imposed 
at a time when Archipelago owned and operated ArcaEx, the equities 
trading facility of PCX, but not the options trading business of the 
Exchange. After the Merger, however, Archipelago will also own 100% of 
the Exchange. Therefore, to preserve the general applicability and 
scope of the ownership and voting restrictions as they currently exist 
in the Certificate of Incorporation of PCXH once Archipelago acquires 
PCXH, the Exchange requests that the Commission approve changes to PCX 
rules and the Archipelago Bylaws that are designed to impose 
substantially similar ownership and voting requirements on 
Archipelago's stockholders that are PCX members to those that currently 
are imposed on PCXH stockholders that are PCX members.
---------------------------------------------------------------------------

    \94\ See supra notes 53 to 58 and accompanying text and 
Certificate of Incorporation of Archipelago, Article FOURTH, 
Sections C and D.
    \95\ See supra note 57 and accompanying text and Certificate of 
Incorporation of Archipelago, Article FOURTH, Section D(2).
---------------------------------------------------------------------------

    Specifically, proposed PCX Rule 3.4 would impose on any OTP Holder 
or OTP Firm that is not an ETP Holder voting and ownership limitations 
that are analogous to those currently imposed on ETP Holders by the 
Certificate of Incorporation of Archipelago. The proposed PCX rules 
also would require OTP Holders, OTP Firms, and their OTP Associates to 
enter into Ownership and Voting Agreements with PCX and Archipelago 
pursuant to which such OTP Holder, OTP Firm or OTP Associate would 
agree to comply with the ownership and voting limitations imposed by 
the proposed PCX rules, to authorize Archipelago to vote their shares 
of Archipelago stock in favor of amendments to the Certificate of 
Incorporation of Archipelago that

[[Page 56958]]

incorporate such ownership and voting limitations, and to be subject to 
the disciplinary action in the proposed PCX rules if they violate any 
of the ownership and voting limitations or fail to enter into such 
Ownership and Voting Agreement.\96\ Under the proposed rules, failure 
to comply with the ownership and voting limitations or failure to enter 
into the Ownership and Voting Agreement as required would subject the 
responsible OTP or OTP Firm to the suspension of all trading rights and 
privileges, unless such violation is cured within a limited time 
period.\97\
---------------------------------------------------------------------------

    \96\ Proposed PCX Rule 3.4(c).
    \97\ See supra note 67 and proposed PCX Rule 13.2(a)(2)(E). PCX 
also proposes amendments to the Archipelago Bylaws that will 
prohibit the board of directors of Archipelago from waiving the 40% 
ownership limitation, the Archipelago Certificate Voting Limitation 
and the Archipelago Certificate Non-Voting Agreement Prohibition 
relating to any OTP Holder, OTP Firm, or any of their related 
persons. See supra note 72 and accompanying text. In addition, PCX 
proposes to amend the Archipelago Bylaws to provide that Archipelago 
will not take any action, and will not permit any of its 
subsidiaries to take any action that will cause (i) ArcaEx to cease 
to be a facility of PCX and PCXE, or (ii) the FSA to cease to be in 
full force and effect, unless each provision in the Certificate of 
Incorporation of Archipelago that is subject to this limitation, 
including the provision relating to ownership by ETP Holders, is 
amended to provide that such provision shall remain in full force 
and effect whether or not ArcaEx remains a facility of PCX and PCXE 
or the FSA is in full force and effect. Archipelago also undertakes 
that its board of directors would: (a) Propose amendments to the 
Certificate of Incorporation of Archipelago to (i) extend the 
application of voting and ownership limitations imposed on ETP 
Holders currently contained in the Certificate of Incorporation of 
Archipelago to OTP Holders and OTP Firms and (ii) delete the phrase 
``[f]or so long as ArcaEx remains a Facility of PCX and PCXE and the 
FSA remains in full force and effect'' from each paragraph that 
contains such language; (b) declare the advisability of such 
amendments; and (c) direct such amendments be submitted for 
stockholder approval. See supra notes 10 and 17 to 19 and 
accompanying text.
---------------------------------------------------------------------------

    The Commission believes that the ownership and voting restrictions 
on OTP Holders and OTP Firms in the proposed PCX rules and the 
Ownership and Voting Agreement, along with the amendment to the 
Archipelago Bylaws that would prohibit the waiver of the 40% ownership 
limitations, Archipelago Certificate Voting Limitation and the 
Archipelago Certificate Non-Voting Agreement Prohibiting for OTP 
Holders, OTP Firms and their related persons, are reasonable and 
consistent with the Act. Members that trade on an exchange or through 
the facility of an exchange traditionally have ownership interests in 
such exchange or facility. As the Commission has noted in the past, 
however, a member's interest in an exchange could become so large as to 
cast doubt on whether the exchange can fairly and objectively exercise 
its self-regulatory responsibilities with respect to that member. A 
member that is a controlling shareholder of an exchange might be 
tempted to exercise that controlling influence by directing the 
exchange to refrain from, or the exchange may hesitate to, diligently 
monitor and surveil the member's conduct or diligently enforce its 
rules and the federal securities laws with respect to conduct by the 
member that violates such provisions.
    The proposed amendments to PCX rules and the Archipelago Bylaws 
that would extend ownership and voting limitations to non-ETP Holder 
members of PCX substantially similar to those that currently exist for 
ETP Holders, coupled with the existing ownership and voting limitations 
contained in the Certificate of Incorporation of Archipelago, are 
designed to preserve the current limitations on direct and indirect 
control of the Exchange, once Archipelago acquires PCXH. The Commission 
therefore believes it is appropriate and consistent with the Act to 
allow a limited exception from the PCXH ownership and voting 
limitations for Archipelago and certain of its Related Persons, to 
allow Archipelago to own 100% of PCXH. These proposed changes will help 
ensure that, upon consummation of the Merger, the public company nature 
of Archipelago will not unduly interfere with or restrict the 
regulatory oversight responsibilities of the Commission or PCX with 
respect to the options and equities business of the Exchange.
2. Exceptions for Members That Are Related Persons of Archipelago
    Archipelago's 100% ownership of PCXH also would cause any member of 
PCX that is a Related Person of Archipelago (for instance, any member 
that is wholly owned by Archipelago) to exceed the ownership and voting 
limitations contained in the Certificate of Incorporation of PCXH. As 
noted above, the proposed exception from the ownership and voting 
restrictions contained in the Certificate of Incorporation of PCXH 
would apply to Archipelago and its Related Persons. The proposed 
exception would not, however, cover any Related Person that is a 
``prohibited person''--i.e., an ETP Holder, OTP Holder, or OTP Firm--
other than those members that are considered ``permitted persons'' or 
specifically approved by the Commission. Permitted persons would 
include: (A) Any broker or dealer approved by the Commission after June 
20, 2005 to be a facility of PCX; (B) any person which has been 
approved by the Commission prior to it becoming subject to the 
provisions of Article Nine of the Certificate of Incorporation of PCXH 
with respect to the voting and ownership of shares of PCXH capital 
stock by such person; and (C) any person which is a related person of 
Archipelago solely by reason of beneficially owning, either alone or 
together with its Related Persons, less than 20% of the outstanding 
shares of Archipelago capital stock.\98\ The proposed Section 4 of 
Article Nine of the Certificate of Incorporation of PCXH would further 
provide that any other prohibited person not covered by the definition 
of a permitted person who would be subject to and exceed the voting and 
ownership limitations imposed by Article Nine as of the date of the 
closing of the Merger would be permitted to exceed the voting and 
ownership limitations imposed by Article Nine only to the extent and 
for the time period approved by the Commission.\99\
---------------------------------------------------------------------------

    \98\ Certificate of Incorporation of PCXH, Proposed Article 
Nine, Section 4.
    \99\ Id.
---------------------------------------------------------------------------

    The Commission believes it is appropriate and consistent with the 
Act to exclude from the scope of the proposed exception to the PCXH 
ownership and voting limitations those Related Persons of Archipelago 
that are members of PCX, other than those that are specifically 
approved by the Commission or that are Related Persons solely because 
of their limited ownership of Archipelago stock, so as to help prevent 
a member or members of PCX from exercising undue influence over, or 
interfering with the operation and self-regulatory function, of the 
Exchange.
    As detailed above, Archipelago currently owns or is affiliated with 
several member of PCX.\100\ By virtue of their affiliation with 
Archipelago, these members would exceed the ownership and voting 
limitations in the Certificate of Incorporation of PCXH after 
Archipelago's acquisition of PCXH, absent an exception. These PCX 
members, however, would be excluded from the proposed exception to 
PCXH's ownership and voting limitations (and thus, Archipelago would be 
required to divest its interest in such PCX members) unless they are 
affirmatively approved by the Commission.
---------------------------------------------------------------------------

    \100\ See supra Section II.C.1.
---------------------------------------------------------------------------

a. Outbound Router
    PCX has specifically requested that the Commission approve an 
exception for Archipelago Securities' Outbound

[[Page 56959]]

Router function as a facility of the Exchange, pursuant to several 
conditions and undertakings. First, Archipelago Securities is, and will 
continue to be operated and regulated as, a facility of PCX. As a 
facility of PCX, PCX would be responsible for regulating the Outbound 
Router function as an exchange facility subject to Section 6 of the 
Act, and the Outbound Router function would be subject to the 
Commission's continuing oversight. Archipelago's performance of its 
Outbound Router function would have to be in compliance with PCX's 
rules.
    Second, the scope of the exception would be limited to the Outbound 
Router function, i.e., routing orders entered into ArcaEx to other 
Market Centers in compliance with PCXE rules. In addition, another 
unaffiliated SRO (the NASD) would continue to have primary regulatory 
oversight responsibility for Archipelago Securities pursuant to Rules 
17d-1 and 17d-2 under the Act. The Commission emphasizes that PCX has 
undertaken to amend the NASD PCX Agreement \101\ within 90 days of the 
Commission's approval of this proposed rule change to expand the scope 
of the NASD's regulatory functions under the NASD PCX Agreement so as 
to encompass all of the regulatory oversight and enforcement 
responsibilities with respect to Archipelago Securities pursuant to 
applicable laws, except for real-time market surveillance.\102\ 
Finally, the continued use of the Outbound Router function also will 
remain optional for other PCX members.\103\
---------------------------------------------------------------------------

    \101\ The Commission notes that such amendment of the NASD PCX 
Agreement is required to be filed with the Commission pursuant to 
Rule 17d-2 under the Act.
    \102\ In Amendment No. 2, PCX clarified that real-time market 
surveillance means marketplace regulation and marketplace 
surveillance, including surveillance and enforcement related to PCXE 
trading rules, PCX and PCXE rules relating to trading on ArcaEx, and 
Commission rules relating to trading.
    \103\ See supra note 38 and accompanying text.
---------------------------------------------------------------------------

    Although the Commission is concerned about potential unfair 
competition and conflicts of interest between an exchange's self-
regulatory obligations and its commercial interests when the exchange 
is affiliated with one of its members, the Commission believes that it 
is appropriate and consistent with the Act to permit Archipelago to 
continue to own and operate Archipelago Securities, in its capacity as 
a facility of PCX that routes orders from ArcaEx to other Market 
Centers, in light of the protections afforded by the conditions 
described above.
b. Inbound Router
    PCX also has requested a temporary exception from the ownership and 
voting limitations for the Inbound Router functions of Wave until 
December 31, 2005, and for Arca Trading until the earlier of March 31, 
2006 and the closing of Archipelago's pending merger with the 
NYSE.\104\ These temporary exceptions would be subject to several 
conditions, as proposed. The operation of both Wave and Arca Trading's 
Inbound Router functions during the interim periods will continue to be 
subject to Archipelago's current information barriers between Wave and 
Arca Trading on the one hand and PCX, PCXE, and other subsidiaries of 
Archipelago that are facilities of PCX or PCXE on the other hand.\105\ 
The Commission also notes that both Wave and Arca Trading are members 
of the NASD as well as PCX, that the NASD is the DEA for both Wave and 
Arca Trading, and that Wave and Arca Trading are, and will continue to 
be during the interim periods, covered by the scope of the NASD PCX 
Agreement.\106\ In addition, during the interim period, the amount of 
revenue that Archipelago can earn from the operation of Arca Trading 
will not exceed 7% of its consolidated revenues, measured on a 
quarterly basis, and the Inbound Router function of Arca Trading will 
not accept any new clients following the closing of the Merger.
---------------------------------------------------------------------------

    \104\ See supra notes 43 and 44 and accompanying text.
    \105\ See PCXE Rule 14.3.
    \106\ The Exchange confirmed that Wave and Arca Trading are, and 
will continue to be during the interim periods, covered by the scope 
of the NASD PCX Agreement. Telephone conversation between Kathryn 
Beck, General Counsel, PCX and David Hsu, Special Counsel, Division, 
Commission, on September 19, 2005.
---------------------------------------------------------------------------

    The affiliation of an exchange with one of its members that 
provides inbound access to the exchange--in direct competition with 
other members of the exchange--raises potential conflicts of interest 
between the exchange's regulatory responsibilities and its commercial 
interests, and the potential for unfair competitive advantage that the 
affiliated member could have by virtue of informational or operational 
advantages, or the ability to receive preferential treatment. In light 
of the conditions that would be imposed during the interim period that 
are designed to mitigate potential conflicts of interest and the 
potential for unfair competitive advantage, the Commission believes it 
is appropriate and consistent with the Act to allow such a limited, 
temporary exception.\107\
---------------------------------------------------------------------------

    \107\ The Commission believes that an Inbound Router function 
provided by an affiliated member of an exchange would be a facility 
of the exchange under Section 3(a)(2) of the Act, 15 U.S.C. 
78c(a)(2), and would be regulated as such.
---------------------------------------------------------------------------

c. Other PCX Members That Are Related Persons of Archipelago
    As noted above in Section II.C.1.c., in addition to its Inbound 
Router function, Arca Trading provides the ATS OTC function,\108\ and 
Archipelago Securities also provides the DOT function in addition to 
its Outbound Router function.\109\ PCX requests the Commission's 
approval for an exception for Arca Trading to allow Archipelago to 
continue to own all of its ownership interest in and operate the ATS 
OTC function on a pilot basis for a period of 60 days following the 
Merger. PCX also requests an exception for Archipelago Securities to 
permit Archipelago to continue to own all of its ownership interest in 
and operate the DOT function of Archipelago Securities on a pilot basis 
until the earlier of (1) a period of 60 days following the closing of 
the Merger, and (2) the closing date of the proposed merger of 
Archipelago and the NYSE (provided that in no event will PCX or 
Archipelago request that this exception be extended beyond the closing 
date of the merger of Archipelago and the NYSE).\110\ The Commission 
believes it is reasonable and consistent with the Act to approve these 
exceptions on a pilot basis, which will provide the public and other 
interested parties an opportunity to comment on the exceptions prior to 
any such exception being made permanent.
---------------------------------------------------------------------------

    \108\ See supra note 48 and accompanying text and Amendment No. 
2.
    \109\ See supra note 49 and accompanying text and Amendment No. 
2.
    \110\ See Amendment No. 2.
---------------------------------------------------------------------------

    With respect to the ATS OTC function, the Commission notes that in 
its adoption of Regulation ATS, it stated that exchanges could form 
subsidiaries that operate ATSs registered as broker-dealers. The 
Commission noted that such subsidiaries would of course be required to 
become members of a national securities association or another national 
securities exchange. The Commission also stated that any subsidiary or 
affiliate ATS could not integrate, or otherwise link the ATS with the 
exchange, including using the premises or property of such exchange for 
effecting or reporting a transaction,

[[Page 56960]]

without being considered a facility of the exchange.\111\
---------------------------------------------------------------------------

    \111\ See Securities Exchange Act Release No. 40760 (December 8, 
1998), 63 FR 70844 (December 22, 1998) at 70891.
---------------------------------------------------------------------------

    Finally, PCX requests the Commission's approval for a temporary 
exception for Terra Nova until December 31, 2005 to allow Gerald D. 
Putnam (the Chairman and CEO of Archipelago) to continue to own in 
excess of 5% of Terra Nova and continue to serve as a director of TAL 
following the Merger.\112\ The Commission believes that such a 
temporary exception is appropriate and consistent with the Act because 
it will eliminate the affiliation between Terra Nova and Archipelago 
but allow Mr. Putnam a reasonable amount of time to effectuate such 
actions necessary to eliminate the affiliation.
---------------------------------------------------------------------------

    \112\ See supra note 45 and accompanying text and Amendment No. 
2.
---------------------------------------------------------------------------

C. Response to Comments

    The Commission received one comment letter on the proposed rule 
change.\113\ This commenter raises a concern regarding the level of 
change to the structure of the Exchange's options market that it 
believes Archipelago intends to undertake once the Merger has been 
completed, and the fact that Archipelago and PCX have not informed the 
Commission of their intent in connection with this proposed rule 
change. In particular, the commenter believes that the intended rule 
changes will align the PCX market with an existing ``ECN-style'' market 
structure of ArcaEx. The commenter recommends that the Commission not 
approve the pending merger while it investigates whether the intended 
rule changes will benefit the investing public.
---------------------------------------------------------------------------

    \113\ See supra note 4.
---------------------------------------------------------------------------

    Pursuant to Section 19(b)(2) of the Act,\114\ the Commission is 
required to approve a proposed rule change on Form 19b-4 filed by an 
SRO pursuant to Rule 19b-4 under the Act \115\ if it finds that such 
proposed rule change is consistent with the requirements of the Act and 
the rules and regulations thereunder applicable to the SRO. PCX is not 
proposing to change its options market structure in this filing. The 
Commission has only considered whether the changes proposed by PCX in 
this rule filing are consistent with the Act. Similarly, the Commission 
would evaluate any future proposals by PCX to change its options rules 
pursuant to the statutory standards in Section 19(b)(2) of the 
Act.\116\
---------------------------------------------------------------------------

    \114\ 15 U.S.C. 78s(b)(2).
    \115\ 17 CFR 240.19b-4.
    \116\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

V. Accelerated Approval of Amendment No. 2

    Pursuant to Section 19(b)(2) of the Act,\117\ 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 thereof, 
unless the Commission find good cause for so finding. The Commission 
hereby find good cause for approving Amendment No. 2 to the proposed 
rule change prior to the thirtieth day after publishing notice of 
Amendment No. 2 in the Federal Register pursuant to Section 19(b)(2) of 
the Act.\118\ Specifically, in Amendment No. 2, the Exchange: (1) 
Revised Form 19b-4 to reflect actions by the stockholders of PCXH 
approving the Merger on September 13, 2005; (2) made certain technical, 
non-substantive corrections to the text of the proposed rule change; 
(3) clarified the scope of the term ``real-time market surveillance'' 
in its discussion of the scope of the NASD PCX Agreement; (4) clarified 
the relationship between Archipelago and Wave, Archipelago and Terra 
Nova, Terra Nova and TAL, and Archipelago and White Cap in relation to 
its requests for temporary exceptions from the PCXH ownership and 
voting requirements; and (5) provided that the temporary exception it 
had requested for Wave in the Notice would be subject to a condition 
that Archipelago will continue to maintain and comply with its existing 
information barriers. These changes in items (1), (2), (3), and (4) are 
technical or non-substantive in nature, and the change in item (5) 
would provide additional safeguards for the proposed exception for 
Wave's Inbound Router function, and raise no new novel issues.
---------------------------------------------------------------------------

    \117\ 15 U.S.C. 78s(b)(2).
    \118\ Id.
---------------------------------------------------------------------------

    In Amendment No. 2, the Exchange also included a request for a 
temporary exception from the PCXH ownership and voting requirements for 
the Inbound Router function of Arca Trading and the related clearing 
function performed by Archipelago Securities, subject to certain 
conditions as outlined above in Section II.C.1.b. The Commission 
believes that good cause exists to accelerate approval of this 
exception because it is limited in duration (i.e., Archipelago must 
divest its ownership interest or cease operations by March 31, 2006 at 
the latest) and subject to several conditions that are designed to 
mitigate any potential conflicts of interest between the ownership and 
operation by Archipelago of the Inbound Router function of Arca Trading 
and the self-regulatory function of PCX and the operation of ArcaEx, as 
well as any potential for unfair competitive advantage.
    Finally, in Amendment No. 2 the Exchange requested (1) an exception 
on a 60 day pilot basis for Archipelago to be able to continue to own 
and operate an ATS for the trading of over-the-counter bulletin board 
securities not traded on any exchange and (2) an exception on a pilot 
basis until the earlier of (a) 60 days and (b) the closing of the 
pending merger between Archipelago and the NYSE for Archipelago to be 
able to continue to own and operate, through Archipelago Securities, a 
service that provides direct connectivity to the NYSE through the DOT 
system. The Commission believes that good cause exists to approve these 
two exceptions on a pilot basis because the public and other interested 
parties will have the opportunity to comment on the substance of the 
exceptions before permanent approval, if permanent approval is 
requested.
    Therefore, the Commission finds that good cause exists to 
accelerate approval of Amendment No. 2 to the proposed rule change, 
pursuant to Section 19(b)(2) of the Act.\119\
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    \119\ Id.
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VI. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change, as amended, is consistent with the requirement of the Act 
the rules and regulations thereunder.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\120\ that: (1) The proposed rule change (SR-PCX-2005-90) and 
Amendment No. 1 thereto are approved; (2) Amendment No. 2 thereto is 
approved on an accelerated basis; (3) the exception for the ATS OTC 
Function of Arca Trading is approved on a pilot basis for a period of 
60 days following the closing of the Merger; (4) the exception for the 
DOT Function of Archipelago Securities is approved on a pilot basis 
until the earlier of (i) a period of 60 days following the closing of 
the Merger, and (ii) the closing date of the proposed merger of 
Archipelago and the NYSE; (5) the temporary exception for Wave is 
approved until December 31, 2005; (6) the temporary exception for the 
Inbound Router function of Arca Trading and the related clearing 
function of Archipelago Securities is approved until the earlier of 
March 31, 2006 and the closing date of the proposed merger of 
Archipelago and the NYSE; and (7) the temporary exception

[[Page 56961]]

for Terra Nova is approved until December 31, 2005.
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    \120\ Id.

    For the Commission, by the Division of Market Regulations, 
pursuant to delegated authority.\121\
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    \121\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
 [FR Doc. E5-5314 Filed 9-28-05; 8:45 am]
BILLING CODE 8010-01-P