[Federal Register Volume 81, Number 35 (Tuesday, February 23, 2016)]
[Notices]
[Pages 9041-9043]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-03669]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77165; File Nos. SR-BSECC-2015-002; SR-SCCP-2015-02; 
SR-BX-2015-085; SR-NASDAQ-2015-160; SR-Phlx-2015-113]


Self-Regulatory Organizations; Boston Stock Exchange Clearing 
Corporation; Stock Clearing Corporation of Philadelphia; NASDAQ OMX BX, 
Inc.; The NASDAQ Stock Market LLC; NASDAQ OMX PHLX LLC; Order Approving 
Proposed Rule Changes, as Modified by Amendments Thereto, To Amend the 
By-Laws of NASDAQ, Inc.

February 17, 2016.

I. Introduction

    On December 21, 2015, each of the Boston Stock Exchange Clearing 
Corporation (``BSECC''), Stock Clearing Corporation of Philadelphia 
(``SCCP''), NASDAQ OMX BX, Inc. (``BX''), The NASDAQ Stock Market LLC 
(``NASDAQ''), and NASDAQ OMX PHLX LLC (``Phlx'' and, together with 
BSECC, SCCP, BX, and NASDAQ, the ``SROs''), filed with the Securities 
and Exchange Commission (``Commission''), pursuant to Section 19(b)(1) 
of the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ proposed rule changes with respect to the By-Laws (``By-
Laws'') of NASDAQ, Inc. (``Company''), the parent company of the SROs. 
The proposed rule changes would revise certain requirements regarding 
Director \3\ qualifications and Director disqualification procedures 
for the Company's Board of Directors (``Board''). On December 29, 2015, 
each SRO filed Amendment No. 1 to its respective proposal.\4\ On 
December 30, 2015, Phlx filed Amendment No. 2 to its proposal.\5\ The 
proposed rule changes, as modified by the amendments thereto, were 
published for comment in the Federal Register on January 7, 2016.\6\ 
The Commission did not receive any comment letters on the proposals. 
This order approves the proposed rule changes, as modified by the 
respective amendments thereto.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ ``Director'' means a member of the Company's Board of 
Directors. See Article I(j) of the By-Laws.
    \4\ Amendment No. 1 for each of the proposals amended and 
replaced the original filing in its entirety. In Amendment No. 1, 
each SRO, among other things, clarified the operation of the current 
and proposed provisions of the By-Laws and how the proposed rule 
change would operate in conjunction with the Listing Rules (as 
herein defined) of NASDAQ.
    \5\ On December 30, 2015, Phlx withdrew Amendment No. 1 for 
technical reasons and, subsequently, filed Amendment No. 2. 
Amendment No. 2 amended and replaced the original filing in its 
entirety.
    \6\ Securities Exchange Act Release Nos. 76806 (December 31, 
2015), 81 FR 838 (SR-BSCC-2015-002); 76807 (December 31, 2015), 81 
FR 828 (SR-SCCP-2015-02); 76808 (December 31, 2015), 81 FR 831 (SR-
BX-2015-085); 76809 (December 31, 2015), 81 FR 817 (SR-NASDAQ-2015-
160); 76810 (December 31, 2015), 81 FR 841 (SR-Phlx-2015-113) 
(collectively, ``Notices'').
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II. Description of the Proposal

    The Company proposes to amend certain provisions of the By-Laws 
that relate to the qualification of Directors.
    First, the Company proposes to amend Section 4.3 of the By-Laws 
(Qualifications), which sets forth the compositional requirements of 
the Board. Currently, Section 4.3 requires that the number of Non-
Industry Directors \7\ on the Board equal or exceed

[[Page 9042]]

the number of Industry Directors,\8\ and that the Board include (1) at 
least two Public Directors; \9\ (2) at least one, but no more than two, 
Issuer Directors; \10\ and (3) no more than one Staff Director,\11\ 
unless the Board consists of ten or more Directors, in which case the 
Board shall include no more than two Staff Directors.
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    \7\ Under the By-Laws, ``Non-Industry Director'' or ``Non-
Industry committee member'' means a Director (excluding any Staff 
Director) or committee member who is (1) a Public Director or Public 
committee member; (2) an Issuer Director or Issuer committee member; 
or (3) any other individual who would not be an Industry Director or 
Industry committee member. See Article I(q) of the By-Laws.
    \8\ Under the By-Laws, ``Industry Director'' or ``Industry 
committee member'' means a Director (excluding any Staff Directors) 
or committee member who (1) is, or within the last year was, or has 
an immediate family member who is, or within the last year was, a 
member of a Self-Regulatory Subsidiary; (2) is, or within the last 
year was, employed by a member or a member organization of a Self-
Regulatory Subsidiary; (3) has an immediate family member who is, or 
within the last year was, an executive officer of a member or a 
member organization of a Self-Regulatory Subsidiary; (4) has within 
the last year received from any member or member organization of a 
Self-Regulatory Subsidiary more than $100,000 per year in direct 
compensation, or received from such members or member organizations 
in the aggregate an amount of direct compensation that in any one 
year is more than 10 percent of the Director's annual gross 
compensation for such year, excluding in each case director and 
committee fees and pension or other forms of deferred compensation 
for prior service (provided such compensation is not contingent in 
any way on continued service); or (5) is affiliated, directly or 
indirectly, with a member or member organization of a Self-
Regulatory Subsidiary. See Article I(m) of the By-Laws. A ``Self-
Regulatory Subsidiary'' is any subsidiary of the Company that is a 
self-regulatory organization as defined under Section 3(a)(26) of 
the Act. See Article I(s) of the By-Laws.
    \9\ Under the By-Laws, ``Public Director'' or ``Public committee 
member'' means a Director or committee member who (1) is not an 
Industry Director or Industry committee member, (2) is not an Issuer 
Director or Issuer committee member, and (3) has no material 
business relationship with a member or member organization of a 
Self-Regulatory Subsidiary, the Company or its affiliates, or the 
Financial Industry Regulatory Authority, Inc. See Article I(r) of 
the By-Laws.
    \10\ Under the By-Laws, ``Issuer Director'' or ``Issuer 
committee member'' means a Director (excluding any Staff Director) 
or committee member who is an officer or employee of an issuer of 
securities listed on a national securities exchange operated by any 
Self-Regulatory Subsidiary, excluding any Director or committee 
member who is a director of such an issuer but is not also an 
officer or employee of such an issuer. See Article I(o) of the By-
Laws.
    \11\ Under the By-Laws, ``Staff Director'' means an officer of 
the Company that is serving as a Director. See Article I(t) of the 
By-Laws.
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    The Company proposes to amend Section 4.3 to state that the Board 
may, rather than shall, include at least one, but no more than two, 
Issuer Directors. Thus, the proposal would allow, but no longer would 
mandate, that the Board include an Issuer Director. The SROs state 
that, while the Company highly values the views of its listed 
companies, the Company does not believe that it is necessary to have an 
Issuer Director on its own Board to represent those views.\12\ The SROs 
state that issues relating to listed companies are generally the 
province of NASDAQ and its board of directors, rather than the Company 
and its Directors, and that NASDAQ's board includes issuer 
representation, as mandated by NASDAQ's by-laws.\13\ Additionally, the 
SROs state that the Company's Directors are experienced and capable 
enough to handle issues relating to listed companies that may arise 
without specifically having an Issuer Director on the Board.\14\
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    \12\ See Notices, supra note 6.
    \13\ See Notices, supra note 6, citing to Article III, Section 2 
of NASDAQ's by-laws.
    \14\ See Notices, supra note 6. The SROs represent that 
currently three of the Company's eleven Directors are also directors 
of companies listed on NASDAQ or another national securities 
exchange. See Notices, supra note 6. The SROs state that these 
Directors do not qualify as Issuer Directors because they are not 
specifically officers or employees of listed companies. However, as 
directors of such companies, the SROs believe that the Directors are 
familiar with corporate governance topics and other issues 
confronted by listed companies. See Notices, supra note 6.
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    Second, the Company proposes to amend Section 4.7 of the By-Laws 
(Disqualification), which addresses the disqualification of a Director 
due to a change in that Director's classification. Specifically, 
Section 4.7 provides that the term of office of a Director shall 
terminate immediately upon a determination by the Board, by a majority 
vote of the remaining Directors, that: (a) The Director no longer 
satisfies the classification for which the Director was elected; and 
(b) the Director's continued service as such would violate the 
compositional requirements of the Board set forth in Section 4.3 of the 
By-Laws.\15\
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    \15\ Section 4.7 of the By-Laws further provides that, if a 
Director's term of office terminates because of such 
disqualification and the remaining term of office for that Director 
at the time of termination is not more than six months, during the 
period of vacancy, the Board shall not be deemed to be in violation 
of Section 4.3 of the By-Laws by virtue of such vacancy. See Section 
4.7 of the By-Laws.
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    The Company proposes to amend Section 4.7 to allow the Board to 
elect to defer determinations under Section 4.7 regarding Director 
disqualification until the next annual meeting of stockholders. In 
addition, the proposals would amend Section 4.7 to provide that, if the 
Board elects to defer such determinations, neither the Board nor any 
committee of the Board would be deemed to be in violation of Section 
4.3 or 4.13 \16\ of the By-Laws as a result of such deferral. The SROs 
state that the nominee selection process for Directors is long and 
complex and the Board cannot act quickly to replace a Director whose 
classification has changed.\17\ The SROs state that the proposed 
amendment to Section 4.7 would allow the Board to continue to make 
informed, deliberate decisions regarding Director nominees, rather than 
require it to act quickly in a way that is not in the best interest of 
the Company's stockholders.\18\ In addition, the SROs state that the 
proposed rule changes would provide the Board with the option to retain 
Directors whose classification has changed but whose continued service 
is otherwise beneficial to the Board, the Company, and its 
stockholders.\19\ Further, the SROs state that the proposed amendment 
to Section 4.7 is designed to prevent the significant disruption that 
the SROs believe would occur if the Board had to replace a Director 
between annual meetings of stockholders.\20\
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    \16\ Section 4.13(h)(iii) of the By-Laws requires the Company's 
Corporate Secretary to certify to the Nominating & Governance 
Committee of the Company's Board the classification of each Director 
after collecting from each nominee for Director information as is 
reasonably necessary to serve as the basis for a determination of 
the nominee's classifications. See Section 4.13(h)(iii) of the By-
Laws.
    \17\ See Notices, supra note 6.
    \18\ Id.
    \19\ Id.
    \20\ Id.
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    The SROs represent that the provisions of the Company's By-Laws 
that relate to Director classifications are completely distinct from 
the listing rules of NASDAQ (``Listing Rules'') and that the proposed 
rule changes do not affect in any way the Company's obligation, as an 
issuer listed on NASDAQ, to comply with the Listing Rules, and that the 
Company will continue to comply with the Listing Rules, including 
provisions relating to corporate governance, following the 
effectiveness of the proposed By-Law amendments.\21\
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    \21\ Id.
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III. Discussion and Commission's Findings

    After careful review, the Commission finds that the proposed rule 
changes are consistent with the requirements of the Act and the rules 
and regulations thereunder applicable to a national securities 
exchange, in the case of the proposals by BX, NASDAQ, and Phlx 
(collectively, the ``Exchanges''), and to a clearing agency, in the 
case of the proposals by BSECC and SCCP.\22\
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    \22\ Additionally, in approving these proposed rule changes, the 
Commission has considered the proposed rules' impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f).
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    The Commission finds that the proposed rule changes by the 
Exchanges to amend the By-Laws are consistent with the requirements of 
Section 6 of the Act and the rules and regulations thereunder 
applicable to a national

[[Page 9043]]

securities exchange.\23\ In particular, the Commission finds that the 
proposed rule changes by the Exchanges are consistent with the 
requirements of Section 6(b)(5) of the Act, which requires, among other 
things, that an exchange's rules be designed 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.\24\
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    \23\ Certain provisions of the Company's By-Laws are considered 
rules of BX, NASDAQ, and Phlx if they are stated policies, 
practices, or interpretations, as defined in Rule 19b-4 under the 
Act, of BX, NASDAQ, and Phlx, and must be filed with the Commission 
pursuant to Section 19(b) of the Act and Rule 19b-4 thereunder. 15 
U.S.C. 78s(b); 17 CFR 240.19b-4.
    \24\ 15 U.S.C. 78f(b)(5).
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    The proposed amendment to Section 4.3 of the By-Laws would allow, 
but no longer require, that the Board include an Issuer Director. The 
Exchanges state that the Company's Directors are sufficiently 
experienced and capable to handle issues relating to listed companies 
without requiring the explicit participation of an Issuer Director.\25\ 
Further, the Exchanges state that issues relating to listed companies 
are generally the province of NASDAQ, as NASDAQ is the Company 
subsidiary that provides listing services.\26\ The Exchanges represent 
that NASDAQ's board includes issuer representation, as mandated by 
NASDAQ's by-laws.\27\ Under the proposals, the Company would still 
retain the option to include one or more Issuer Director on the Board.
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    \25\ See Notices, supra note 6.
    \26\ Id.
    \27\ Id.
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    The proposed amendment to Section 4.7 of the By-Laws would allow 
the Board to elect to defer determinations under Section 4.7 regarding 
Director disqualification until the next annual meeting of 
stockholders, and to do so without being in violation of the By-Laws. 
The By-Laws currently are silent regarding the required timeframe 
within which the Board must make Director disqualification 
determinations under Section 4.7. The Exchanges represent that the 
proposal would aid the Board to act in the best interests of the 
Company and its stockholders as it would allow the Board to continue to 
make informed, deliberate decisions regarding Director nominees and 
prevent the significant disruption that the SROs believe would occur if 
the Board were forced to replace a Director between annual 
meetings.\28\
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    \28\ Id.
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    Based on the foregoing, the Commission finds that the proposed rule 
changes filed by BX, NASDAQ, and Phlx are consistent with the Act.
    The Commission also finds that the proposed rule changes by BSECC 
and SCCP are consistent with the requirements of the Act and the rules 
and regulations thereunder applicable to clearing agencies. Section 
17A(b)(3)(F) of the Act requires, among other things, that the rules of 
a clearing agency be designed to protect investors and the public 
interest.\29\ In addition, Rule 17Ad-22(d)(8) under the Act requires 
registered clearing agencies to establish, implement, maintain, and 
enforce written policies and procedures reasonably designed to have 
governance arrangements that are clear and transparent.\30\ Here, BSECC 
and SCCP filed proposed rule changes to highlight changes being made to 
the By-Laws of the Company,\31\ which indirectly owns BSECC and SCCP. 
Therefore, the proposed rule changes by BSECC and SCCP help make clear 
and transparent the governance arrangements of the Company and, thus, 
BSECC and SCCP, which helps ensure investor protection and the public 
interest.
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    \29\ 15 U.S.C. 78q-1(b)(3)(F).
    \30\ 17 CFR 240.17Ad-22(d)(8).
    \31\ Certain provisions of the Company's By-Laws are considered 
rules of BSECC and SCCP if they are stated policies, practices, or 
interpretations, as defined in Rule 19b-4 under the Act, of BSECC 
and SCCP, and must be filed with the Commission pursuant to Section 
19(b) of the Act and Rule 19b-4 thereunder. 15 U.S.C. 78q-1(b); 17 
CFR 240.19b-4. See supra note 23.
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    The Commission notes that the Company, as an issuer listed on 
NASDAQ, will continue to be required to comply with NASDAQ's Listing 
Rules, including the provisions in the Listing Rules relating to 
Corporate Governance Requirements, which requirements may differ from 
the By-Laws. The SROs have represented that the Company will continue 
to comply with the Listing Rules following the effectiveness of the 
proposed By-Law amendments.\32\ The Commission further notes that the 
Listing Rules provide generally that a majority of the directors of a 
listed issuer must be ``independent'' as defined in those rules and 
that a listed issuer's audit, compensation, and nominations committees 
must be composed solely of directors who are ``independent.'' \33\ 
Because the Company's securities are listed on NASDAQ, the Commission 
notes that, when deferring determinations regarding Director 
disqualification pursuant to revised Section 4.7 of the By-Laws, the 
Company also must take into account the Listing Rules, including the 
``cure periods'' contained therein, if the Director is serving in the 
capacity of an ``independent director'' within the meaning of the 
Listing Rules.
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    \32\ See Notices, supra note 6.
    \33\ See NASDAQ Rules 5605(b)(1), (c)(2), (d)(2), and (e).
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IV. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule changes, as modified by the amendments thereto, are consistent 
with the Act and the rules and regulations thereunder applicable to a 
national securities exchange, in the case of BX, NASDAQ, and Phlx, and 
to a registered clearing agency, in the case of BSECC and SCCP.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\34\ that the proposed rule changes (SR-BSECC-2015-002; SR-SCCP-
2015-02; SR-BX-2015-085; SR-NASDAQ-2015-160; SR-Phlx-2015-113), as 
modified by the amendments thereto, be, and hereby are, approved.
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    \34\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\35\
Robert W. Errett,
Deputy Secretary.
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    \35\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2016-03669 Filed 2-22-16; 8:45 am]
 BILLING CODE 8011-01-P