[Federal Register Volume 84, Number 196 (Wednesday, October 9, 2019)]
[Notices]
[Pages 54198-54201]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-22018]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-87219; File No. SR-NASDAQ-2019-081]
Self-Regulatory Organizations; The Nasdaq Stock Market LLC;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To
Amend Certain Constitutional Documents
October 3, 2019.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on September 20, 2019, The Nasdaq Stock Market LLC (``Nasdaq'' or
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I and II 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.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend its Second Amended Limited Liability
Company Agreement (``LLC Agreement'') and By-Laws (``By-Laws''), as
further discussed below.
The text of the proposed rule change is available on the Exchange's
website at http://nasdaq.cchwallstreet.com, at the principal office of
the Exchange, and at the Commission's Public Reference Room.
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 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 these
[[Page 54199]]
statements may be examined at the places specified in Item IV below.
The 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
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend its LLC Agreement and By-Laws to (i)
harmonize certain provisions related to the regulatory independence of
the Exchange with those of the Exchange's affiliates, Nasdaq ISE, LLC
(``ISE''), Nasdaq GEMX, LLC (``GEMX''), and Nasdaq MRX, LLC (``MRX''),
(ii) modify Director categorizations, (iii) update compositional
requirements of the Regulatory Oversight Committee (``ROC''), and (iv)
make additional, non-substantive edits. Each change is discussed
below.\3\
---------------------------------------------------------------------------
\3\ All references herein and in the Exhibit 5 to ``the
Company'' mean the Exchange. Company is defined in the LLC Agreement
and the By-Laws to mean The Nasdaq Stock Market LLC.
---------------------------------------------------------------------------
LLC Agreement
The Exchange proposes to modify a number of provisions in its LLC
Agreement related to the regulatory independence of the Exchange. As
discussed below, the Exchange believes that the proposed changes will
make these provisions more robust and will serve to align the
Exchange's LLC Agreement with the LLC Agreements of its affiliates,
ISE, GEMX, and MRX.
Distributions: The Exchange currently has distribution
provisions in Section 15 of the LLC Agreement that prohibits the
Exchange from making distributions to its sole member (i.e., Nasdaq,
Inc.), using Regulatory Funds.\4\ The Exchange now proposes to amend
this provision to substantively conform to Section 15 in the ISE, GEMX,
and MRX LLC Agreements by specifying that Regulatory Funds shall not be
used for non-regulatory purposes, but rather shall be used to fund the
legal, regulatory and surveillance operations of the Exchange. The
Exchange believes these are minor changes that make the distribution
provisions more robust by specifying how Regulatory Funds may be used.
Lastly, the Exchange proposes to add that it would not be required to
make a distribution to the sole member if such distribution would
otherwise be required to fulfill the regulatory functions or
responsibilities of the Exchange.
---------------------------------------------------------------------------
\4\ ``Regulatory Funds'' means fees, fines, or penalties derived
from the regulatory operations of the Exchange. ``Regulatory Funds''
shall not be construed to include revenues derived from listing
fees, market data revenues, transaction revenues, or any other
aspect of the commercial operations of the Exchange, even if a
portion of such revenues are used to pay costs associated with the
regulatory operations of the Exchange. See LLC Agreement, Schedule
A. The definition of Regulatory Funds is not changing under this
proposal.
---------------------------------------------------------------------------
Books and Records: Section 16 of the LLC Agreement
presently sets forth certain information relating to general
administrative matters with respect to the books and records of the
Exchange, including requirements as to the maintenance of the
Exchange's books and records, and inspection rights, among other
provisions. The Exchange proposes to amend Section 16 to provide that
the books and records of the Exchange must be maintained in the United
States, which will harmonize this provision with Section 16 in the ISE,
GEMX, and MRX LLC Agreements. The Exchange further proposes to
substantially conform to ISE, GEMX, and MRX in Section 16 by providing
that all confidential information relating to the self-regulatory
function of the Exchange (including but not limited to disciplinary
matters, trading data, trading practices and audit information)
contained in the books and records of the Exchange shall: (i) Not be
made available to any persons other than to those officers, directors,
employees and agents of the Exchange that have a reasonable need to
know the contents thereof, (ii) be retained in confidence by the
Exchange and the officers, directors, employees and agents of the
Exchange, and (iii) must not be used for any non-regulatory purpose.
Furthermore, the Exchange proposes to add, similar to the ISE, GEMX,
and MRX LLC Agreements, that nothing in the LLC Agreement shall be
interpreted as to limit or impede the rights of the Commission to
access and examine such confidential information pursuant to federal
securities laws and the rules and regulations thereunder, or to limit
or impede the ability of any officers, directors, employees or agents
of the Exchange to disclose such confidential information to the
Commission. The Exchange believes that the proposed changes will add
more specificity as to who may access the Exchange's books and records,
especially relating to confidential information on the self-regulatory
function of the Exchange, and the use of such information.
Assignments: Section 20 of the LLC Agreement currently
prohibits the Exchange's sole member from transferring or assigning in
whole or in part its limited liability company interest in the
Exchange, except to an affiliate of the sole member. The Exchange now
proposes to provide in Section 20 that any transfer or assignment by
the sole member of its equity ownership interest in the Exchange is
prohibited unless it is filed and approved by the Commission pursuant
to a rule filing, and to delete the member affiliate exception to the
general prohibition on transfers and assignments. This will align
Section 20 of the Exchange's LLC Agreement with Section 20 in the LLC
Agreements of ISE, GEMX, and MRX.
By-Law Article I
Currently, the Exchange's Board compositional requirements require
at least one Public Director and at least one issuer representative (or
if the Board consists of ten or more Directors, at least two issuer
representatives).\5\ As set forth in Article I, Section (y), a ``Public
Director'' is defined as a Director who has no material business
relationship with a broker or dealer, the Exchange or its affiliates,
or FINRA. ``Issuer representative'' is not defined specifically in the
Exchange's By-Laws, but is implicitly defined in the term Non-Industry
Director as ``an officer, director, or employee of an issuer of
securities listed on the national securities exchange operated by the
Company.'' \6\ The Exchange now proposes to clarify in the definition
of Public Director that, for the avoidance of doubt, a director of an
issuer of securities listed on the national securities exchange
operated by the Exchange shall not be precluded from being considered a
Public Director solely on the basis of such directorship. The Exchange
believes that a director of a listed company can adequately represent
the interests of listed companies on the Board and therefore be
considered an issuer representative. At the same time, the Exchange
does not believe that such a directorship always constitutes a material
business relationship with a broker or dealer, the Exchange or its
affiliates, or FINRA, which would prohibit the individual from being
considered a Public Director.\7\ Of course, such issuer
[[Page 54200]]
representative must still meet the requirements of a Public Director
and not have such material business relationships by definition. Thus
in limited circumstances, the Exchange believes that it is possible for
directors of listed companies to be considered both Public Directors
and issuer representatives. In light of the foregoing, the Exchange
also proposes to make conforming changes to the definition of a
``Public member'' of a committee.\8\
---------------------------------------------------------------------------
\5\ See By-Law Article III, Section 2(a).
\6\ In addition, the term ``Non-Industry Director'' encompasses
a Director (excluding Staff Directors) who is a Public Director or
any other individual who would not be an Industry Director. See By-
Law Article I, Section (v).
\7\ This is consistent with the longstanding best practice of
the Exchange's parent, Nasdaq, Inc., having the Chairman of the
Audit Committee of the board of directors of Nasdaq, Inc. serve as
the Chairman of the Exchange Board's Regulatory Oversight Committee,
which is required to be comprised of Public Directors who are also
considered ``independent directors'' as defined in Nasdaq Rule 5605.
See By-Law Article III, Section 5(c). Because Nasdaq, Inc. is a
listed company, this Exchange Director could be considered both an
issuer representative and a Public Director.
\8\ See By-Law Article I, Section (z).
---------------------------------------------------------------------------
The Exchange does not seek to amend the Board's qualification
requirements in the By-Laws other than the proposed changes to the
definition of Public Director. With the proposed changes, the
composition of the Board would still be required to reflect a balance
among Non-Industry Directors (including Public Directors and issuer
representatives), Industry Directors,\9\ and Member Representative
Directors.\10\ Accordingly, current Board qualification requirements
such as the number of Non-Industry Directors, including at least one
Public Director and at least one issuer representative (or if the Board
consists of ten or more Directors, at least two issuer
representatives), equaling or exceeding the sum of the number of
Industry Directors and Member Representative Directors would continue
to apply.\11\
---------------------------------------------------------------------------
\9\ The term ``Industry Director'' means a Director (excluding
any two officers of the Company, selected at the sole discretion of
the Board, amongst those officers who may be serving as Directors
(the ``Staff Directors'')), who (i) is or has served in the prior
three years as an officer, director, or employee of a broker or
dealer, excluding an outside director or a director not engaged in
the day-to-day management of a broker or dealer; (ii) is an officer,
director (excluding an outside director), or employee of an entity
that owns more than ten percent of the equity of a broker or dealer,
and the broker or dealer accounts for more than five percent of the
gross revenues received by the consolidated entity; (iii) owns more
than five percent of the equity securities of any broker or dealer,
whose investments in brokers or dealers exceed ten percent of his or
her net worth, or whose ownership interest otherwise permits him or
her to be engaged in the day-to-day management of a broker or
dealer; (iv) provides professional services to brokers or dealers,
and such services constitute 20 percent or more of the professional
revenues received by the Director or 20 percent or more of the gross
revenues received by the Director's firm or partnership; (v)
provides professional services to a director, officer, or employee
of a broker, dealer, or corporation that owns 50 percent or more of
the voting stock of a broker or dealer, and such services relate to
the director's, officer's, or employee's professional capacity and
constitute 20 percent or more of the professional revenues received
by the Director or member or 20 percent or more of the gross
revenues received by the Director's or member's firm or partnership;
or (vi) has a consulting or employment relationship with or provides
professional services to the Company or any affiliate thereof or to
FINRA (or any predecessor) or has had any such relationship or
provided any such services at any time within the prior three years.
See By-Law Article I, Section (l).
\10\ The term ``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
pursuant to the Exchange's By-Laws. A Member Representative Director
may, but is not required to be, an officer, director, employee, or
agent of a Nasdaq Member. See By-Law Article I, Section (q). Member
Representative Directors are directors that meet the fair
representation requirement in Section 6(b)(3) of the Act, which
requires that the ``rules of the Exchange assure a fair
representation of its members in the selection of its directors and
administration of its affairs . . .''
\11\ See By-Law Article III, Section 2(a). In addition, the
Board qualification requirement that at least 20% of the Directors
be Member Representative Directors will continue to apply. See LLC
Agreement Section 9(a).
---------------------------------------------------------------------------
By-Law Article III, Section 5(c)
Currently, By-Law Article III, Section 5(c) requires that the ROC
be comprised of three members, each of whom shall be a Public Director
and an ``independent director'' as defined in Nasdaq Rule 4200. The
Exchange proposes to amend Section 5(c) to provide that the ROC shall
be comprised of at least three members, as is currently set forth in
the ROC Charter.\12\ All members of the ROC will continue to be Public
Directors and ``independent directors.'' Lastly, the Exchange also
proposes to make technical changes in Section 5(c) to correct a
typographical error and to update the reference to Nasdaq Rule 4200 to
Rule 5605.
---------------------------------------------------------------------------
\12\ The ROC Charter is available at: http://ir.nasdaq.com/static-files/ad0a0102-e977-40cf-8139-15c359576a25.
---------------------------------------------------------------------------
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\13\ in general, and furthers the objectives of Section
6(b)(1), Section 6(b)(3), and Section 6(b)(5) of the Act,\14\ in
particular, which require, among other things, an exchange to be so
organized as to have the capacity to be able to carry out the purposes
of the Act; that one or more directors be representative of issuers and
investors and not be associated with a member of the exchange, broker,
or dealer; and that the rules of an exchange be designed to promote
just and equitable principles of trade, to remove impediments to and
perfect the mechanism of a free and open market and a national market
system, and, in general to protect investors and the public interest.
---------------------------------------------------------------------------
\13\ 15 U.S.C. 78f(b).
\14\ 15 U.S.C. 78f(b)(1), (b)(3), and (b)(5).
---------------------------------------------------------------------------
LLC Agreement
The Exchange believes that the proposed changes to the LLC
Agreement provisions on distributions, books and records, and
assignments are consistent with the Act. As discussed above, the
Exchange believes that its proposal will bring greater specificity and
detail to provisions related to the regulatory independence of the
Exchange. The Exchange believes that the proposed changes will make
clear the independence of the Exchange's regulatory function and
facilitate the ability of the Exchange to carry out its responsibility
and operate in a manner consistent with the Act. Furthermore, the
proposed amendments will have the additional benefit of bringing the
Exchange's LLC Agreement into greater conformity with those of ISE,
GEMX, and MRX, thereby creating more consistent standards among the
affiliated exchanges owned by Nasdaq, Inc.\15\
---------------------------------------------------------------------------
\15\ See ISE, GEMX, and MRX LLC Agreements, Sections 15, 16, and
20.
---------------------------------------------------------------------------
By-Law Article I
The Exchange believes that the proposed changes to the definitions
of Public Director and Public member are consistent with the Act as
these modifications are intended to make clear that a Director is not
barred from being considered a Public Director merely because the
Director serves as a director of an issuer of securities listed on the
national securities exchange operated by the Exchange, and are
consistent with current corporate governance practices.\16\
Furthermore, as discussed above, the requirements that the number of
Non-Industry Directors (including at least one Public Director and at
least one issuer representative, or at least two issuer representatives
if the Board consists of ten or more Directors) equal or exceed the sum
of the number of Industry Directors and Member Representative
Directors, and at least 20% of the Directors be Member Representative
Directors, would continue to apply.\17\ Accordingly, the Exchange
believes that the proposed changes will more accurately reflect the
Exchange's current operations and governance practices while continuing
to comport with the Exchange's statutory obligations regarding fair
representation under Section 6(b)(3) of the Act.
---------------------------------------------------------------------------
\16\ See supra note 7.
\17\ See supra notes 10 and 11, with accompanying text.
---------------------------------------------------------------------------
By-Law Article III, Section 5(c)
The Exchange believes that the proposed rule change in By-Law
Article III, Section 5(c) to provide that the ROC shall be comprised of
at least three members is consistent with the Act
[[Page 54201]]
because it will promote transparency to the Exchange's current
practices by conforming the By-Law language to the ROC Charter. As
discussed above, the composition requirements that all ROC members be
Public Directors and ``independent directors'' as defined in Nasdaq's
Rules will remain unchanged with this proposal, thereby ensuring that
an independent Board committee will continue to be responsible for the
regulatory oversight of the Exchange. Lastly, the proposed technical
changes in Section 5(c) to correct a typographical error and to update
the reference to Nasdaq Rule 4200 to Rule 5605 will bring greater
clarity to the Exchange's rules, which will protect investors and the
public interest.
B. Self-Regulatory Organization's Statement on Burden on Competition
Because the proposed rule change relates to the corporate
governance of the Exchange and not to the Exchange's operations, the
Exchange does not believe that the proposed rule change will impose any
burden on competition 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
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule change does not: (i)
Significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative for 30 days from the date on which it was filed, or
such shorter time as the Commission may designate, it has become
effective pursuant to Section 19(b)(3)(A) of the Act \18\ and
subparagraph (f)(6) of Rule 19b-4 thereunder.\19\
---------------------------------------------------------------------------
\18\ 15 U.S.C. 78s(b)(3)(A).
\19\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change, along
with a brief description and text of the proposed rule change, at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
The Exchange has satisfied this requirement.
---------------------------------------------------------------------------
A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the
Act \20\ normally does not become operative for 30 days after the date
of its filing. However, Rule 19b-4(f)(6)(iii) \21\ permits the
Commission to designate a shorter time if such action is consistent
with the protection of investors and the public interest. The Exchange
has requested that the Commission waive the 30-day operative delay. The
Commission notes that waiver of the operative delay would allow the
Exchange to effect the changes to its LLC Agreement and By-Laws, which
would provide more specificity and would better align provisions in the
Exchange's LLC Agreement with those in the LLC Agreements of its
affiliates, in time for the Exchange Board meeting on September 25,
2019. The Commission believes that waiver of the 30-day operative delay
is consistent with the protection of investors and the public interest.
Accordingly, the Commission hereby waives the operative delay and
designates the proposed rule change operative upon filing.\22\
---------------------------------------------------------------------------
\20\ 17 CFR 240.19b-4(f)(6).
\21\ 17 CFR 240.19b-4(f)(6)(iii).
\22\ For purposes only of waiving the 30-day operative delay,
the Commission also has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
---------------------------------------------------------------------------
At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings to
determine whether the proposed rule change should be approved or
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:
Electronic Comments
Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-NASDAQ-2019-081 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-NASDAQ-2019-081. This
file number should be included on the subject line if email 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 website (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 website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 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. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-NASDAQ-2019-081 and should be submitted
on or before October 30, 2019.
---------------------------------------------------------------------------
\23\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\23\
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-22018 Filed 10-8-19; 8:45 am]
BILLING CODE 8011-01-P