[Federal Register Volume 72, Number 237 (Tuesday, December 11, 2007)]
[Notices]
[Pages 70357-70360]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-23917]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56876; File No. SR-NASDAQ-2007-068]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing of Amendment No. 2 to a Proposed Rule Change To Amend 
the Limited Liability Company Agreement of The NASDAQ Stock Market LLC; 
and Order Granting Accelerated Approval of the Proposed Rule Change, as 
Modified by Amendment Nos. 1 and 2

November 30, 2007.

I. Introduction

    On July 20, 2007, The NASDAQ Stock Market LLC (``Nasdaq'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') a proposed rule change, pursuant to section 19(b)(1) 
of the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ to amend its Limited Liability Company Agreement (``LLC 
Agreement''). On September 26, 2007, Nasdaq filed Amendment No. 1 to 
the proposed rule change. The proposed rule change, as modified by 
Amendment No. 1, was published for comment in the Federal Register on 
October 5, 2007.\3\ The Commission received no comments on the 
proposal. On November 16, 2007, Nasdaq filed Amendment No. 2 to the 
proposed rule change (``Amendment No. 2''). This notice and order 
notices Amendment No. 2; solicits comments from interested persons on 
Amendment No. 2; and approves the proposed rule change, as amended, on 
an accelerated basis.
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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. 56581 (September 28, 
2007), 72 FR 57083 (``Notice'').
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II. Description of the Proposal

    Nasdaq proposes to amend its LLC Agreement, which includes its by-
laws (`` By-Laws'') to: (1) Revise the process by which its directors 
(``Directors'') are nominated and elected; (2) amend the compositional 
requirements for its board of directors (``Board'') and several 
committees; and (3) make certain other changes as described below.

A. Election of Fair Representation Directors

    Nasdaq proposes to amend its LLC Agreement, including its By-Laws, 
to revise the process by which the members of its Board are nominated 
and elected. Section 6(b)(3) of the Act \4\ requires a national 
securities exchange to establish rules that assure a fair 
representation of its members in the selection of its directors. 
Nasdaq's LLC Agreement currently provides that twenty percent of the 
directors on the Board will be ``Member Representative Directors.'' \5\ 
The Board appoints a ``Member Nominating Committee,'' which nominates 
and creates a list of candidates for each Member Representative 
Director position on the Board, and nominates candidates for 
appointment by the Board for each vacant or new position on a committee 
that is to be filled with a Member Representative under Nasdaq's By-
Laws.\6\ Additional candidates may be added to the list of candidates 
for Member Representative Director positions if a Nasdaq Exchange 
Member submits a timely and duly executed written nomination to the 
Secretary of the Exchange.\7\ These candidates, together with those 
nominated by the Member Nominating Committee, are then presented to 
Exchange members for election.\8\
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    \4\ 15 U.S.C. 78f(b)(3).
    \5\ ``Member Representative Director'' means a Director ``who 
has been elected or appointed after having been nominated by the 
Member Nominating Committee or by a Nasdaq Member * * * '' See 
Exchange By-Laws Article I(q).
    \6\ See Nasdaq By-Laws Article II, Section 1(b) and 3, and 
Article III, Section 6(b).
    \7\ See Nasdaq By-Laws Article II, Section 1(c).
    \8\ See Nasdq By-Laws Article II, Section 2.
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    Under the proposal, the Board will continue to appoint a Member 
Nominating Committee, which will nominate candidates for each Member 
Representative Director position on the Board, and nominate candidates 
for appointment by the Board for each vacant or new position on a 
committee that is to be filled with a Member Representative under 
Nasdaq's By-Laws. In Amendment No. 2,\9\ Nasdaq proposes to add the 
requirement that, in appointing the Member Nominating Committee, the 
Board will consult with representatives of members of the Exchange.\10\ 
Also, members will continue to be able to add candidates to the list of 
candidates for Member Representative Director positions through the 
petitions process. The timing and method for the petition process will 
not change pursuant to the proposal. The list of candidates for Member 
Representative Director positions and the election date will be 
announced by the Exchange in a Notice to Members and in a prominent 
location on a publicly accessible Web site. Such announcement also will 
describe the procedures for Exchange members to nominate candidates for 
election at the next annual meeting.\11\
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    \9\ The text of Amendment No. 2 is available at Nasdaq's Web 
site http://nasdaq.complinet.com, at Nasdaq, and at the Commission's 
Public Reference Room.
    \10\ See Proposed Nasdaq By-Laws Article III, Section 6(b)(iii).
    \11\ See Proposed Nasdaq By-Laws Article II, Section 1(a).
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    If the list of candidates (comprised of those candidates nominated 
by the Member Nominating Committee and any candidates added through the 
petition process) exceeds the number of positions to be elected, a 
formal notice of the election date and list of candidates will be sent 
by the Exchange to its members as of the record date at least 10 days, 
but no more than 60 days, prior to the election date.\12\ As is 
currently the case, each Exchange member that is eligible to vote will 
have the right to cast one vote for each Member Representative Director 
position to be filled, and the persons on the list of candidates who 
receive the

[[Page 70358]]

most votes will be elected to the Member Representative Positions.\13\ 
If there is only one candidate for each Member Representative position 
to be filled, the Member Representative Directors will be elected from 
the list of candidates by The Nasdaq Stock Market, Inc., Nasdaq's 
parent company.\14\
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    \12\ See Proposed Nasdaq By-Laws Article II, Section 1(a) and 
(c).
    \13\ See Proposed Nasdaq By-Laws Article II, Section 2. Nasdaq 
is also amending By-Laws Article II, Section 2 to provide that votes 
may be cast until 11:59 p.m. (rather than 5 p.m.) on the election 
date. Id.
    \14\ See Proposed Nasdaq By-Laws Article II, Section (c).
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B. Board and Committee Compositional Requirements

    Nasdaq proposes to make several changes to its By-Laws pertaining 
to the compositional requirements of its Board and committees thereof.
    First, Nasdaq's By-Laws currently require that twenty percent of 
its directors shall be Member Representative Directors.\15\ Nasdaq 
proposes to amend the LLC Agreement to require that at least twenty 
percent of Nasdaq's directors shall be Member Representative 
Directors.\16\ Thus, Nasdaq would not be required to remove a 
previously elected Member Representative Director if the Board's size 
was reduced.
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    \15\ See Nasdaq LLC Agreement, Section 9.
    \16\ See Proposed Nasdaq LLC Agreement, Section 9.
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    Second, Nasdaq proposes to amend the compositional requirements of 
its Quality of Markets Committee (``QMC''). Currently,\17\ Nasdaq's QMC 
must be comprised of an equal number of Industry \18\ and Non-Industry 
Directors.\19\ Nasdaq proposes to amend this provision such that the 
number of Non-Industry members on the QMC must equal or exceed the 
number of Industry members and Member Representative members.\20\ The 
Exchange represents that this change is consistent with certain 
undertakings made by Nasdaq with regard to the composition of this 
committee.\21\
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    \17\ See Nasdaq By-Laws Article III, Section 6(c)(ii).
    \18\ Generally, an ``Industry Director'' is, among other things, 
a Director that is or has been an officer, director, employee, or 
owner of a broker-dealer. In addition, persons who have a consulting 
or employment relationship with the Exchange, its affiliates, or the 
National Association of Securities Dealers, Inc (``NASD'') (n/k/a 
Financial Industry Regulatory Authority, Inc. or FINRA) are 
considered ``Industry.'' See Nasdaq By-Laws Article I(l).
    \19\ ``Non-Industry Director'' means a ``Director (excluding 
Staff Directors) who is (i) a Public Director; (ii) and officer or 
employee of an issuer of securities listed on the national 
securities exchange operated by the [Exchange]; or (iii) any other 
individual who would not be an Industry Director.'' See Nasdaq By-
Laws Article I(v).
    ``Public Director'' means a ``Director who has no material 
business relationship with a broker or dealer, the [Exchange] or its 
affiliates, or the NASD.'' See Nasdaq By-Laws Article I(y).
    \20\ See Proposed Nasdaq By-Laws Article III, Section 6(c)(ii).
    \21\ In the Matter of National Association of Securities 
Dealers, Inc., Order Instituting Public Proceedings Pursuant to 
Section 19(h)(1) of the Securities Exchange Act of 1934, Making 
Findings, and Imposing Remedial Sanctions, Securities Exchange Act 
Release No. 37538 (August 8, 1996) (Administrative Proceeding File 
No. 3-9056) (``1996 Settlement Order'') (requiring ``at least fifty 
percent independent public and non-industry membership'' in the 
QMC). Nasdaq was previously bound by the 1996 Settlement Order due 
to its status as a subsidiary of the NASD, and in connection with 
Nasdaq's Exchange application, Nasdaq submitted a letter to the 
Commission affirming that it would comply with the 1996 Settlement 
Order, except as specified. See Letter to Robert L.D. Colby, Acting 
Director, Division of Market Regulation, Commission, from Edward S. 
Knight, Executive Vice President, General Counsel, and Chief 
Regulatory Officer, Nasdaq, dated January 11, 2006).
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    Third, Nasdaq proposes to amend the compositional requirements 
applicable to its Arbitration and Mediation Committee (``Arbitration 
Committee''), which currently provide that the committee shall consist 
of no fewer than 10 and no more than 25 members.\22\ As amended, 
Nasdaq's By-Laws would require the committee consist of no fewer than 3 
and no more than 10 members.\23\ The balance requirements applicable to 
this committee will remain unchanged, consistent with the 1996 
Settlement Order.\24\ Nasdaq believes that a reduction in the size of 
this committee is appropriate because FINRA manages an arbitration and 
mediation program for use of Nasdaq members pursuant to a regulatory 
services agreement with FINRA, and because Nasdaq has appointed the 
members of FINRA's Arbitration and Mediation Committee to also serve on 
Nasdaq's Arbitration Committee.\25\
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    \22\ See Nasdaq By-Laws Article III, Section 6(e)(iii).
    \23\ See Proposed Nasdaq By-Laws Article III, Section 6(e)(iii).
    \24\ See 1996 Settlement Order, supra note 21, (requiring ``at 
least fifty percent independent public and non-industry membership'' 
in the Arbitration Committee).
    \25\ See Notice, supra note 3, at Section II.A.1.
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    Fourth, Nasdaq proposes to amend the compositional requirements of 
the Nasdaq Review Council (``NRC''), which currently require this 
committee to be comprised of no fewer than 12 and no more than 14 
members.\26\ As amended, Nasdaq's By-Laws would require the NRC to be 
comprised of no fewer than 8 and no more than 12 members.\27\ The 
Exchange believes that because Nasdaq and FINRA are parties to an 
agreement under Rule 17d-2 of the Act \28\ that allocates 
responsibility to FINRA for enforcing a wide range of common rules with 
respect to common members, the caseload of the NRC is likely to be 
considerably lower than that of the FINRA's comparable committee, the 
National Adjudicatory Council. Therefore, Nasdaq believes that reducing 
the size of this committee will be consistent with the efficient 
discharge of its responsibilities.\29\ Nasdaq is also proposing an 
amendment to allow NRC members to serve two consecutive three-year 
terms,\30\ consistent with Nasdaq's other appellate review body, the 
Nasdaq Listing and Hearing Review Council.\31\
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    \26\ See Nasdaq By-Laws Article VI, Section 2.
    \27\ See Proposed Nasdaq By-Laws Article Article VI, Section 2.
    \28\ 17 CFR 240.17d-2.
    \29\ See Notice, supra note 3, at Section II.A.1.
    \30\ See Proposed Nasdaq By-Laws Article VI, Section 4(c).
    \31\ See Proposed Nasdaq By-Laws Article VI, Section 4(c).
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C. Other Changes

    Nasdaq is proposing to make various other changes to its LLC 
Agreement. Specifically, the proposal would remove out of date 
references to the Exchange's initial directors and officers, and 
provisions that were applicable to the transitional period between the 
formation of Nasdaq and when it commenced operations as a national 
securities exchange.\32\ The proposed rule change also amends Nasdaq's 
LLC Agreement to provide that amendments to the LLC Agreement 
(including the By-Laws) must be approved by the Board and also 
reflected in a written agreement executed by The Nasdaq Stock Market, 
Inc., as sole member of Nasdaq within the meaning of the Delaware 
Limited Liability Company Act. Changes to the LLC Agreement must also 
be filed with the Commission pursuant to section 19(b) of the Act.\33\ 
Further, Nasdaq is amending Article IX, Section 1 of its By-Laws (i) to 
make explicit that Nasdaq's Board is authorized to adopt and amend 
rules for the required or voluntary arbitration of controversies 
between members and between members and customers or others, and (ii) 
to delete from the list of the Board's specified authorities the

[[Page 70359]]

authority to issue exemptions from, suspend, or cancel Exchange 
rules.\34\
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    \32\ Nasdaq represents that up-to-date information regarding the 
current directors of Nasdaq and its parent corporation, The Nasdaq 
Stock Market, Inc., is maintained at http://ir.nasdaq.com/directors.cfm (with a link provided from http://www.nasdaq.com). The 
Exchange also certifies that information regarding the officers of 
Nasdaq is kept up to date and is available to the Commission and the 
public upon request, and is filed with the Commission as an 
amendment to its Form 1 every three years, as required by Rule 6a-2 
under the Act, 17 CFR 240.6a-2. See Notice, supra note 3, at note 
10.
    \33\ 15 U.S.C. 78s(b).
    \34\ Nasdaq notes that the deletion of a reference to the 
Board's authority to issue exemptions from Nasdaq rules should not 
be construed to limit Nasdaq's authority under rules that, by their 
terms, explicitly authorize waivers or exemptions. See Notice, supra 
note 3, at note 15 and accompanying text.
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    Finally, the proposal amends Nasdaq's By-Laws to correct 
typographical errors.

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 Number SR-NASDAQ-2007-068 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-1090.

All submissions should refer to Amendment No. 2 to File Number SR-
NASDAQ-2007-068. 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, 100 F Street, NE., Washington, DC 20549, on official 
business days between the hours of 10 a.m. and 3 p.m. Copies of such 
filing also will be available for inspection and copying at the 
principal office of the Exchange. 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 to File Number SR-NASDAQ-2007-068 and should be 
submitted on or before January 2, 2008.

IV. Discussion

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange.\35\ In 
particular, the Commission finds that the proposal is consistent with 
section 6(b)(3) of the Act,\36\ which requires, among other things, 
that the rules of an exchange assure a fair representation of its 
members in the selection of its directors and administration of its 
affairs. The Commission also finds that the proposal is consistent with 
section 6(b)(1) of the Act,\37\ which requires, among other things, 
that an exchange be so organized and have the capacity to carry out the 
purposes of the Act, and to comply and enforce compliance by its 
members and persons associated with its members, with the provisions of 
the Act, the rules and regulation thereunder, and the rules of the 
exchange.
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    \35\ In approving this proposed rule change, the Commission 
notes that it has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \36\ 15 U.S.C. 78f(b)(3).
    \37\ 15 U.S.C. 78f(b)(1).
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    The Commission notes that although the Exchange will no longer hold 
a member election for Member Representative Directors if the number of 
candidates for election does not exceed the number of vacancies, 
members will continue to be able to petition to have candidates added 
to the list of candidates, as is currently the case. Also, the 
Commission notes that should the number of candidates exceed the number 
of vacancies, Exchange members will have the opportunity to elect the 
candidates to fill the open Member Representative Director positions. 
If no such election is required (i.e., the number of candidates equals 
the number of position to be filled), The Nasdaq Stock Market, Inc. 
will elect the candidates on the list of candidates prepared by the 
Member Nominating Committee. Additionally, the Exchange's Board will 
now be obligated to consult with Exchange members when appointing 
individuals to the Member Nominating Committee. The Commission 
previously considered and approved rules of another Exchange that 
provide a similar structure for the selection of directors.\38\ In 
addition, the Commission believes that the requirement that at least 
twenty percent of the directors be Member Representative Directors, and 
the means by which Member Representative Directors are to be nominated 
and elected, provides for the fair representation of the Exchange's 
members in the selection of its directors and administration of its 
affairs, consistent with the requirements of section 6(b)(3) of the 
Act.\39\
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    \38\ See Securities Exchange Act Release No. 53382 (February 27, 
2006), 71 FR 11251 (March 6, 2007) (SR-NYSE-2005-77) (``Release No. 
34-53382'') (order granting approval of proposed rule change 
relating to NYSE's business combination with Archipelago Holdings, 
Inc., which included the bylaws of NYSE Market, Inc.).
    \39\ 15 U.S.C. 78f(b)(3).
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    Pursuant to the proposal, the Exchange's By-Laws will provide that 
the number of Non-Industry members of the Exchange's QMC must equal or 
exceed the number of Industry members. The proposal also will reduce 
the size of the Exchange's Arbitration Committee and the NRC, but will 
not otherwise alter the compositional requirements of, or method for 
designating, these committees. The Commission notes that the proposed 
compositional balance for the QMC and Arbitration Committee is 
consistent with the 1996 Settlement Order requirement that such 
committees maintain at least fifty percent independent public and non-
industry membership. The Commission therefore believes that the 
proposal is designed to assure that the Exchange be organized and have 
the capacity to carry out the purposes of the Act.
    For the foregoing reasons, the Commission finds that the proposed 
rule is consistent with the Act.

V. Accelerated Approval

    The Commission finds good cause for approving the proposed rule 
change, as modified by Amendment No. 2, 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.\40\ In Amendment No. 2, Nasdaq 
added the that requirement the Board will appoint individuals to the 
Member Nominating Committee after appropriate consultation with 
Exchange members.\41\ The Commission believes that such a requirement 
is consistent with the

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requirement under section 6(b)(3) of the Act \42\ that the rules of an 
exchange assure a fair representation of its members in the selection 
of its directors. The Commission also notes that such a requirement is 
consistent with the rules of another exchange, which were approved by 
the Commission,\43\ and therefore believes that Amendment No. 2 raises 
no new issues. The Commission therefore finds good cause exists to 
accelerate approval of the proposed change, as modified by Amendment 
No. 2, pursuant to section 19(b)(2) of the Act.
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    \40\ 15 U.S.C. 78s(b)(2). Pursuant to Section 19(b)(2) of the 
Act, 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 finds good 
cause for so doing.
    \41\ The changes pursuant to Amendment No. 2 are discussed more 
fully in Section II.A. See supra notes 9 and 10 and accompanying 
text.
    \42\ 15 U.S.C. 78f(b)(3).
    \43\ See Article III, Section 5 of the Amended and Restated 
Bylaws of NYSE Market, Inc. See also Release No. 34-53382, supra 
note 38.
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VI. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\44\ that the proposed rule change (SR-NASDAQ-2007-068) as modified 
by Amendment Nos. 1 and 2, be, and hereby is, approved on an 
accelerated basis.
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    \44\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\45\
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    \45\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-23917 Filed 12-10-07; 8:45 am]
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