[Federal Register Volume 74, Number 96 (Wednesday, May 20, 2009)]
[Notices]
[Pages 23761-23764]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-11740]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59907 File No. SR-NASDAQ-2009-042]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing of Proposed Rule Change To Amend Its Limited Liability 
Agreement

May 12, 2009.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'' or ``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ notice 
is hereby given that, on April 29, 2009, The NASDAQ Stock Market LLC 
(``NASDAQ Exchange'' or ``Exchange'') filed with the Securities and 
Exchange Commission (``Commission'') the proposed rule change as 
described in Items I, II, and III below, which Items have been prepared 
by the Exchange. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The NASDAQ Exchange is filing this proposed rule change with regard 
to proposed changes to its Limited Liability Company Agreement (the 
``Agreement'').\3\ The proposed rule change will be implemented as soon 
as practicable following approval by the Commission. The text of the 
proposed rule change is available at http://www.cchwallstreet.com/nasdaq, at the NASDAQ Exchange's principal office, and at the 
Commission's Public Reference Room.
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    \3\ The Agreement includes and incorporates an exhibit 
designated as the By-Laws of the NASDAQ Exchange (the ``By-Laws''). 
Under applicable Delaware law, the By-Laws are considered part of 
the Agreement.
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II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

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

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

1. Purpose
    On July 24, 2008, NASDAQ OMX acquired the Philadelphia Stock 
Exchange, Inc. (renamed NASDAQ OMX PHLX, Inc. (``PHLX'')), and on 
August 29, 2008, NASDAQ OMX acquired the Boston Stock Exchange, 
Incorporated (renamed NASDAQ OMX BX, Inc. (``BX'')). Following those 
acquisitions, the NASDAQ Exchange, PHLX, and BX have been evaluating 
means to realize synergies in the operations of these three exchanges 
while maintaining the separate identity and member representation 
structures of each.
    In making this evaluation, the NASDAQ Exchange and its sister 
exchanges have given consideration to the experiences of their 
respective boards and have reviewed the governance documents of other 
exchanges. In particular, the NASDAQ Exchange and the other exchanges 
have reviewed the board structures established by NYSE Euronext and its 
exchange subsidiaries. In Securities Exchange Act Release No. 55293,\4\ 
the Commission approved a structure in which certain committees of the 
board of directors of NYSE Euronext, the public holding company, 
perform functions for exchange subsidiaries, which do not themselves 
have these committees. Specifically, the Commission's approval order 
states that ``the NYSE Euronext board of directors will have an audit 
committee, a human resource and compensation committee, and a 
nominating and governance committee. Each of the audit committee, human 
resource and compensation committee, and nominating and governance 
committee of the NYSE Euronext board of directors will consist solely 
of directors meeting the independence requirements of NYSE Euronext. 
These committees also will perform relevant functions for NYSE 
Group,\5\ the Exchange,\6\ NYSE Market,\7\ NYSE Regulation,\8\ 
Archipelago,\9\ NYSE Arca,\10\ and NYSE Arca Equities,\11\ as well as 
other subsidiaries of NYSE Euronext, except that the board of directors 
of NYSE Regulation will continue to have its own compensation committee 
and nominating and governance committee.''
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    \4\ Securities Exchange Act Release No. 55293 (February 14, 
2007), 72 FR 8033 (February 22, 2007) (SR-NYSE-2006-120).
    \5\ NYSE Group, Inc., the former public holding company of NYSE 
Euronext's U.S. exchanges.
    \6\ New York Stock Exchange LLC (``NYSE''), a registered 
national securities exchange.
    \7\ NYSE Market, Inc., a subsidiary of NYSE to which it has 
delegated certain operational authority.
    \8\ NYSE Regulation, Inc., a subsidiary of NYSE to which it has 
delegated certain operational authority.
    \9\ Archipelago Holdings, Inc., formerly the public holding 
company of the entities now known as NYSE Arca, Inc. and NYSE Arca 
Equities, Inc.
    \10\ NYSE Arca, Inc., a registered national securities exchange.
    \11\ NYSE Arca Equities, Inc., a subsidiary of NYSE Arca to 
which it has delegated certain operational authority.
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    The NASDAQ Exchange and the other exchanges owned by NASDAQ OMX 
have also considered the experience of the NASDAQ Exchange in operating 
as a subsidiary of a public company since 2006. During the period, the 
board of each of the NASDAQ Exchange and its parent corporation 
(currently NASDAQ OMX, and formerly The Nasdaq Stock Market, Inc.) has 
appointed its own audit committee and management compensation 
committee. However, these committees at the NASDAQ Exchange level have 
generally found themselves duplicating the work of other committees at 
the exchange or holding company level. The NASDAQ OMX audit committee 
has broad authority to review the financial information that will be 
provided to shareholders and others, systems of internal controls, and 
audit, financial reporting and legal and compliance processes. Because 
NASDAQ OMX's financial statements are prepared on a consolidated basis 
that includes the financial results of NASDAQ OMX's subsidiaries, 
including the NASDAQ Exchange and the other exchange subsidiaries, the 
NASDAQ OMX audit committee's purview necessarily includes these 
subsidiaries. The committee is composed of four or five directors, all 
of whom must be independent under the standards established by Section 
10A(m) of the Act \12\ and Rule 4200(a) of the NASDAQ Exchange. All 
committee members must be able to read and understand financial 
statements, and at least one member must have past employment 
experience in finance or accounting, requisite professional 
certification in accounting,

[[Page 23762]]

or any other comparable experience or background that results in the 
individual's financial sophistication.
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    \12\ 15 U.S.C. 78j-1(m).
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    By contrast, the audit committee of the NASDAQ Exchange has a more 
limited role, focused solely on the exchange entity and its 
subsidiaries that operate as facilities of the NASDAQ Exchange. As 
described in the current By-Laws, the primary functions of the audit 
committee are (i) oversight over financial reporting, (ii) oversight 
over the systems of internal controls established by management and the 
Board and the legal and compliance process, (iii) selection and 
evaluation of independent auditors, and (iv) direction and oversight of 
the internal audit function. However, to the extent that the committee 
reviews financial and accounting matters, its activities are 
duplicative of the activities of the NASDAQ OMX audit committee, which 
is also charged with providing oversight over financial reporting and 
independent auditor selection for NASDAQ OMX and all of its 
subsidiaries, including the NASDAQ Exchange, BX, and PHLX and their 
subsidiaries. Similarly, the NASDAQ OMX audit committee has general 
responsibility for oversight over internal controls and direction and 
oversight over the internal audit function for NASDAQ OMX and all of 
its subsidiaries. Thus, the responsibilities of the exchanges' audit 
committees are fully duplicated by the responsibilities of the NASDAQ 
OMX audit committee. Accordingly, the NASDAQ Exchange is proposing to 
allow the elimination of its audit committee by amending Article III, 
Section 5 of the By-Laws.\13\
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    \13\ Similarly, BX is proposing elimination of its audit 
committee (SR-BX-2009-021 (April 29, 2009)). PHLX expects to file a 
similar proposed rule change in the near future.
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    The NASDAQ Exchange believes, however, that even in light of the 
NASDAQ OMX audit committee's overall responsibilities for internal 
controls and the internal audit function, it is nevertheless important 
for the NASDAQ Exchange Board to maintain its own independent oversight 
over the NASDAQ Exchange's controls and internal audit matters relating 
to the NASDAQ Exchange's operations. In this regard, the NASDAQ 
Exchange notes that its regulatory oversight committee currently has 
broad authority to oversee the adequacy and effectiveness of the NASDAQ 
Exchange's regulatory and self-regulatory organization 
responsibilities, and is therefore able to maintain oversight over 
controls in tandem with the NASDAQ OMX audit committee's overall 
control oversight responsibilities. Similarly, it is already the 
practice of NASDAQ OMX's Internal Audit Department 
(``Department''),\14\ which performs internal audit functions for all 
NASDAQ OMX subsidiaries, to report to the NASDAQ Exchange regulatory 
oversight committee on all internal audit matters relating to the 
NASDAQ Exchange. This practice will be formally reflected in the 
Department's written procedures. In addition, to ensure that the NASDAQ 
Exchange Board retains authority to direct the Department's activities 
with respect to the NASDAQ Exchange, the Department's written 
procedures will be amended to stipulate that the NASDAQ Exchange 
regulatory oversight committee may, at any time, direct the Department 
to conduct an audit of a matter of concern to it and report the results 
of the audit both to the NASDAQ Exchange regulatory oversight committee 
and the NASDAQ OMX audit committee.
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    \14\ See e-mail from John Yetter, Vice President and Deputy 
General Counsel, NASDAQ OMX Group, Inc., to Christopher W. Chow, 
Special Counsel, Commission, dated May 5, 2009.
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    The NASDAQ Exchange also proposes to amend Section 4.13 of the By-
Laws in order to follow the NYSE Euronext model with respect to 
allowing the elimination of its compensation committee and the 
performance of its function by the NASDAQ OMX compensation committee 
and/or subsidiary boards. The NASDAQ OMX By-Laws provide that its 
compensation committee considers and recommends compensation policies, 
programs, and practices for employees of NASDAQ OMX. Because many 
employees performing work for the NASDAQ Exchange are also employees of 
NASDAQ OMX, its compensation committee already performs these functions 
for such employees. Moreover, certain of its senior officers are also 
officers of NASDAQ OMX and other NASDAQ OMX subsidiaries because their 
responsibilities relate to multiple entities within the NASDAQ OMX 
corporate structure. Accordingly, NASDAQ OMX pays these individuals and 
establishes compensation policy for them. Most notably, the Chief 
Executive Officer of the NASDAQ Exchange is also an ``executive 
officer'' of NASDAQ OMX within the meaning of NASDAQ Exchange Rule 
4350. Under that rule, the compensation of executive officers of an 
issuer of securities, such as the common stock of NASDAQ OMX, that is 
listed on the NASDAQ Exchange, must be determined by, or recommended to 
the board of directors for determination by, a majority of independent 
directors or a compensation committee comprised solely of independent 
directors. Accordingly, the NASDAQ OMX board of directors and/or its 
compensation committee is legally required to establish the 
compensation for this individual.
    To the extent that policies, programs, and practices must also be 
established for any NASDAQ Exchange officers or employees who are not 
also NASDAQ OMX officers or employees, the NASDAQ Exchange Board will 
perform such actions without the use of a compensation committee (but 
subject to the recusal of Staff Directors).\15\ Moreover, as already 
provided in the Agreement, the regulatory oversight committee of the BX 
Board must be informed about the compensation and promotion or 
termination of the BX chief regulatory officer and the reasons 
therefor, to allow it to provide oversight over decisions affecting 
this key officer.
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    \15\ Staff Directors are directors of the NASDAQ Exchange that 
are also serving as officers. Since the NASDAQ Exchange Board would 
not be responsible for setting the compensation of any Staff 
Directors who are also officers of NASDAQ OMX, they would be 
permitted to participate in discussions concerning compensation of 
NASDAQ Exchange employees, but would recuse themselves from a vote 
on the subject to allow the determination to be made by directors 
that are not officers or employees of the NASDAQ Exchange. If a 
Staff Director was not also an employee of NASDAQ OMX, that Staff 
Director would also absent himself or herself from any deliberations 
regarding his or her compensation.
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    The NASDAQ Exchange is also proposing to amend Article III, Section 
6 to allow the NASDAQ Exchange Board to eliminate its arbitration and 
mediation committee, provided that, as is currently the case, the 
NASDAQ Exchange's arbitration and mediation program is operated by the 
Financial Industry Regulatory Authority (``FINRA'') in accordance with 
FINRA rules pursuant to a regulatory services agreement.\16\ As 
provided in the Agreement, the arbitration and mediation committee is 
to advise the Board on the development and maintenance of an equitable 
and efficient system of dispute resolution that will equally serve the 
needs of

[[Page 23763]]

public investors and NASDAQ Exchange members, to monitor rules and 
procedures governing the conduct of dispute resolution, and to have 
such other powers and authority as are necessary to effectuate the 
purposes of the NASDAQ Exchange rules. However, because the NASDAQ 
Exchange's arbitration and mediation program is operated by FINRA in 
accordance with FINRA rules, there is no meaningful role for a 
committee to advise the Board with respect to the operation of the 
program or the development of rules, nor have the NASDAQ Exchange rules 
provided the committee with any specific administrative power or 
authority. Rather, any information needed by the Board or NASDAQ 
Exchange staff to evaluate the effectiveness of FINRA's administration 
of the program is obtained through the NASDAQ Exchange's oversight of 
FINRA's performance through its authority under its regulatory services 
agreement to obtain reports from FINRA and to conduct audits. 
Accordingly, the NASDAQ Exchange has concluded that the committee may 
reasonably be eliminated. However, the Agreement will continue to 
provide for the establishment of such a committee in the event that the 
NASDAQ Exchange later opts to establish an arbitration or mediation 
program that is not operated by FINRA in accordance with FINRA rules. 
In such an event, the committee would play a role in advising the Board 
in the manner currently described in the Agreement.
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    \16\ The NASDAQ Exchange and FINRA are parties to a Regulatory 
Services Agreement (``RSA'') that is dated June 28, 2000 but that 
did not become operative until July 1, 2006, when the NASDAQ 
Exchange first began to operate as a national securities exchange. 
Under the RSA, FINRA provides a comprehensive dispute resolution 
program for NASDAQ members. Prior to July 1, 2006, The Nasdaq Stock 
Market, Inc., which was the predecessor of the NASDAQ Exchange, 
operated a market as a facility of the National Association of 
Securities Dealers, Inc. (``NASD''), FINRA's predecessor. 
Accordingly, neither the NASDAQ Exchange nor its predecessor market 
has ever operated a dispute resolution program that was not 
administered by FINRA or NASD.
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    The NASDAQ Exchange is also proposing to make minor changes to its 
rules governing the selection of Member Representative Directors. Under 
the Agreement, twenty percent of the NASDAQ Exchange's directors are 
selected through a process in which the NASDAQ Exchange member 
nominating committee nominates a slate of candidates but members also 
have the opportunity to nominate alternative candidates. If no 
alternative candidates are duly nominated by members, the candidates 
recommended by the member nominating committee are elected. 
Alternatively, if alternative candidates are nominated, there is a 
``Contested Election'' in which members cast ballots in order to 
determine who fills the vacancies. In connection with its acquisition 
by NASDAQ OMX, BX recently adopted a similar process.\17\ When 
Commission staff reviewed the applicable BX filing, staff required that 
BX adopt a provision providing that a member, either alone or together 
with its affiliates, may not cast votes representing more than twenty 
percent of the votes cast for a candidate, and any votes cast by the 
member, either alone or together with its affiliates, in excess of the 
twenty percent limit shall be disregarded. The NASDAQ Exchange proposes 
to amend Article II, Section 2 of the By-Laws to adopt a similar 
limitation. Similarly, Commission staff suggested that BX adopt 
clarifications to the definition of ``Voting Date,'' which is analogous 
to the definition of ``Election Date'' in the Agreement. The NASDAQ 
Exchange is now amending Article I of the By-Laws to provide that an 
Election Date is selected by the Board on an annual basis, but that 
members only cast votes on such date if there is a Contested Election.
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    \17\ Securities Exchange Act Release No. 58324 (August 7, 2008), 
73 FR 46936 (August 12, 2008) (SR-BSE-2008-02, -23, -25, SR-BSECC-
2001-01).
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    Finally, the NASDAQ Exchange is updating the Agreement to reflect 
the name change of The Nasdaq Stock Market, Inc. to The NASDAQ OMX 
Group, Inc.;\18\ the name change of National Association of Securities 
Dealers, Inc. to FINRA;\19\ to correct typographical errors in the 
definition of ``Industry member'' in Article I of the By-Laws and in 
Section 6 of the Agreement; and to redesignate the Agreement as the 
``Second Amended Limited Liability Company Agreement of The NASDAQ 
Stock Market LLC.'' \20\
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    \18\ See Preamble, Signature Page, and Schedule A and B of the 
Agreement; Article I of the By-Laws.
    \19\ See Article I of the By-Laws.
    \20\ See Preamble and Signature Page of the Agreement; Preamble 
of the By-Laws.
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2. Statutory Basis
    The NASDAQ Exchange believes that its proposal is consistent with 
Section 6(b) of the Act \21\ in general, and furthers the objectives 
of: (1) Section 6(b)(1) of the Act,\22\ which requires a national 
securities exchange to be so organized and have the capacity to carry 
out purposes of the Act and to enforce compliance by its members and 
persons associated with its members with the provisions of the Act; and 
(2) Section 6(b)(5) of the Act,\23\ in that it is designed, among other 
things, to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, to remove impediments 
to and perfect the mechanism of a free and open market and a national 
market system, and, in general, to protect investors and the public 
interest. Specifically, the proposed rule change will allow the 
elimination of two Board committees whose roles are limited by the 
NASDAQ Exchange's status as a wholly owned subsidiary of NASDAQ OMX, 
thereby allowing directors to focus greater attention on matters 
falling directly within the purview of the Board, including regulatory 
quality, market structure, new product initiatives, and review of 
proposed rule changes. The filing also allows the elimination of the 
NASDAQ Exchange arbitration and mediation committee, whose role is 
considerably limited by the NASDAQ Exchange's use of FINRA to manage 
its arbitration and mediation program. The filing also adopts 
improvements to the process for selection of Member Representative 
Directors, to limit the influence of a group of affiliated members over 
an election. Finally, the filing adopts clarifications, updates 
terminology, and corrects typographical errors in several provisions of 
the Agreement.
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    \21\ 15 U.S.C. 78f(b).
    \22\ 15 U.S.C. 78(b)(1).
    \23\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The NASDAQ Exchange does not believe that the proposed rule change 
will result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act.

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

    Written comments were neither solicited nor received.

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

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

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

[[Page 23764]]

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-2009-042 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NASDAQ-2009-042. 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 the 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 File Number SR-NASDAQ-2009-042 and should 
be submitted on or before June 10, 2009.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\24\
Florence E. Harmon,
Deputy Secretary.
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    \24\ 17 CFR 200.30-3(a)(12).
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[FR Doc. E9-11740 Filed 5-19-09; 8:45 am]
BILLING CODE 8010-01-P