Federal Register / Vol. 74, No. 153 / Tuesday, August 11, 2009 / Notices 40265 

5 15 U.S.C. 78s(b)(3)(A). 

6 17 CFR 240.19b–4(f)(6). 

7 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 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 complied with this 

requirement. 

8 Id. 

9For purposes only of waiving the 30-day 

operative delay of this proposal, the Commission 

has considered the proposed rule’s impact on 

efficiency, competition, and capital formation. See 

15 U.S.C. 78c(f). 

10 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3By Amendment No. 1, the Exchange updated its 

proposal to reflect that The NASDAQ Stock Market 

LLC and NASDAQ OMX BX, Inc. have already 

eliminated their audit committees. 

B. Self-Regulatory Organization’s 

Statement on Burden on Competition 

The Exchange does not believe that 

the proposed rule change will impose 

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 

No written comments were solicited 

or received with respect to the proposed 

rule change. 

III. Date of Effectiveness of the 

Proposed Rule Change and Timing for 

Commission Action 

Because the foregoing proposed rule 

change: (i) Does not significantly affect 

the protection of investors or the public 

interest; (ii) does not impose any 

significant burden on competition; and 

(iii) by its terms, does not become 

operative for 30 days from the date on 

which it was filed, or such shorter time 

as the Commission may designate, if 

consistent with the protection of 

investors and the public interest, it has 

become effective pursuant to Section 

19(b)(3)(A) of the Act 5 and Rule 19b– 

4(f)(6) thereunder.6

A proposed rule change filed under 

Rule 19b–4(f)(6) normally may not 

become operative prior to 30 days after 

the date of filing.7 However, Rule 19b– 

4(f)(6)(iii) 8 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 so that the proposal may be 

operative in conjunction with the 

release of the Primary Until 9:45 Order 

in order to eliminate potential confusion 

associated with the GTC or GTD 

designation of a Primary Until 9:45 

Order. The Commission believes such 

waiver is consistent with the protection 

of investors and the public interest.9

At any time within 60 days of the 

filing of the proposed rule change, the 

Commission may summarily abrogate 

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. 

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 e-mail to rulecomments@sec.gov. Please include File 

Number SR–NYSEArca–2009–69 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–NYSEArca–2009–69. 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 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 File Number SR– 

NYSEArca–2009–69 and should be 

submitted on or before September 1, 

2009. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.10

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. E9–19144 Filed 8–10–09; 8:45 am] 

BILLING CODE 8010–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–60431; File No. SR–Phlx– 

2009–59] 

Self-Regulatory Organizations; 

NASDAQ OMX PHLX, Inc.; Notice of 

Filing of Proposed Rule Change, and 

Amendment No. 1 Thereto, Relating to 

the Exchange’s By-Laws, Regulatory 

Oversight Committee and Referee 

Program 

August 4, 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 July 27, 2009, NASDAQ OMX PHLX, 

Inc. (‘‘Phlx’’ 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. 

On July 30, 2009, the Exchange filed 

Amendment No. 1 to the proposed rule 

change.3 The Commission is publishing 

this notice to solicit comments on the 

proposed rule change, as amended, from 

interested persons. 

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

The Exchange proposes to amend its 

By-Laws to establish a regulatory 

oversight committee of the Board of 

Governors (the ‘‘Board’’); describe the 

office and responsibilities of the chief 

regulatory officer in the By-Laws; 

eliminate the audit committee and 

compensation committee of the Board, 

with their duties being assigned to other 

board committees of Phlx or its parent 

corporation, The NASDAQ OMX Group, 

Inc. (‘‘NASDAQ OMX’’); amend the 

Exchange’s By-Laws to delete the 

Referee process and establish a new 

Options Trade Review Committee in 


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4See Securities Exchange Act Release No. 59764 

(April 20, 2009), 74 FR 18761 (April 24, 2009) (SR– 

Phlx–2009–17) (approving proposal to modify the 

process for nominating Governors of the Exchange); 

Securities Exchange Act Release No. 59697 (April 

4, 2009), 74 FR 16249 (April 9, 2009) (SR–Phlx– 

2009–23) (proposing to eliminate various standing 

committees of the Exchange and making other 

miscellaneous changes). The Commission notes that 

the latter filing was approved by the Commission 

on May 14, 2009. See Securities Exchange Act 

Release No. 59924 (May 14, 2009), 74 FR 23759 

(May 20, 2009). 

5Securities Exchange Act Release No. 55293 

(February 14, 2007), 72 FR 8033 (February 22, 2007) 

(SR–NYSE–2006–120). 

6NYSE Group, Inc., the former public holding 

company of NYSE Euronext’s U.S. exchanges. 

7New York Stock Exchange LLC (‘‘NYSE’’), a 

registered national securities exchange. 

8NYSE Market, Inc., a subsidiary of NYSE to 

which it has delegated certain operational 

authority. 

9NYSE Regulation, Inc., a subsidiary of NYSE to 

which it has delegated certain operational 

authority. 

10Archipelago Holdings, Inc., formerly the public 

holding company of the entities now known as 

NYSE Arca, Inc. and NYSE Arca Equities, Inc. 

11NYSE Arca, Inc., a registered national securities 

exchange. 

12NYSE Arca Equities, Inc., a subsidiary of NYSE 

Arca to which it has delegated certain operational 

authority. 13 15 U.S.C. 78j–1(m). 

lieu thereof; and make conforming 

changes to the Exchange’s Rules and 

Options Floor Procedure Advice. 

The text of the proposed rule change 

is available on the Exchange’s Web site 

at http://nasdaqomxphlx.cchwallstreet.

com/NASDAQOMXPHLX/Filings/, 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 those 

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 the 

Statutory Basis for, the Proposed Rule 

Change 

1. Purpose 

Modifications to the Regulatory 

Oversight Structure of the Board of 

Governors 

On July 24, 2008, Phlx was acquired 

by NASDAQ OMX. Following that 

acquisition, Phlx has been assessing 

means to improve its governance 

structure and conform it more closely to 

that of The NASDAQ Stock Market LLC 

(the ‘‘NASDAQ Exchange’’), an effort 

that has already resulted in the 

submission of several proposed rule 

changes to the Commission.4 In 

addition, Phlx—together with the 

NASDAQ Exchange and NASDAQ OMX 

BX, Inc. (formerly the Boston Stock 

Exchange, and also an exchange 

subsidiary of NASDAQ OMX)—has 

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, Phlx 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, Phlx and the 

other exchanges have reviewed the 

board structures established by NYSE 

Euronext and its exchange subsidiaries. 

In Securities Exchange Act Release No. 

55293,5 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,6 the 

Exchange,7 NYSE Market,8 NYSE 

Regulation,9 Archipelago,10 NYSE 

Arca,11 and NYSE Arca Equities,12 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.’’ 

Phlx 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 Phlx 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 13 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, or any other 

comparable experience or background 

that results in the individual’s financial 

sophistication. 

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 of the NASDAQ Exchange 

(which are, in this respect, virtually 

identical to the current By-Laws of 

Phlx), 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 


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14Securities Exchange Act Release No. 60276 

(July 9, 2009), 74 FR 34840 (July 17, 2009) (SR– 

NASDAQ–2009–042) (‘‘Release No. 34–60276’’). 

Similarly, BX has eliminated its audit committee. 

Securities Exchange Act Release No. 60247 (July 17, 

2009), 74 FR 33495 (July 13, 2009) (SR–BX–2009– 

021) (‘‘Release No. 34–60247’’). 

15Section 10–9 of the By-Laws. 

16The audit committee also currently performs 

functions relating to the Referee, who has authority 

to review certain decisions of Options Exchange 

Officials. As described below, the Exchange 

proposes to replace the Referee with a new Options 

Trade Review Committee. 

17An independent governor is one who has no 

material relationship with Phlx or any affiliate of 

Phlx, any member of Phlx or any affiliate of such 

member, or any issuer of securities that are traded 

on Phlx or a facility of Phlx. 

18Phlx also notes that authority of the audit 

committee with respect to the Exchange’s Code of 

Conduct and whistleblowing regarding accounting 

practices have been assumed by NASDAQ OMX, 

which, as a public company, maintains a Code of 

Ethics program and anonymous whistleblower 

hotline for NASDAQ OMX and its subsidiaries in 

compliance with the requirements of the SarbanesOxley Act, 15 U.S.C. 78j–1, 7264. 

19The Commission notes that it recently 

approved proposals by BX and the NASDAQ 

Exchange to eliminate their compensation 

committees. See Release Nos. 34–60247 and 60276, 

supra note 14. These exchanges have eliminated 

those committees. See e-mail from Edith Hallahan, 

Counsel, Phlx, to Nancy Burke-Sanow, Assistant 

Director, Commission, dated August 3, 2009. 20The position of Chief Executive Officer of Phlx 

is currently vacant, pending selection of a 

successor. 

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 

has eliminated its audit committee by 

amending Article III, Section 5 of the 

By-Laws.14

Similarly, drawing upon the model 

established by NYSE Euronext and the 

experience of the NASDAQ Exchange, 

Phlx is proposing to amend Section 10– 

9 of its By-Laws to eliminate its audit 

committee. While the committee 

formerly played a vital role in oversight 

of the preparation of Phlx’s financial 

statements when Phlx was owned by a 

group of investors and sat at the top of 

a holding company structure, that role 

has been assumed by the NASDAQ 

OMX audit committee now that Phlx is 

a wholly owned subsidiary. Moreover, 

since Phlx does not currently have a 

regulatory oversight committee, Phlx is 

now proposing to establish such a 

committee so that regulatory oversight 

functions formerly performed by the 

audit committee may be assumed by the 

new committee.15 The new committee 

will oversee the adequacy and 

effectiveness of Phlx’s regulatory and 

self-regulatory organization 

responsibilities; assess Phlx’s regulatory 

performance; and assist the Board and 

its standing committees in reviewing the 

regulatory plan and the overall 

effectiveness of Phlx’s regulatory 

functions. In furtherance of its 

functions, the committee shall (a) 

review Phlx’s regulatory budget and 

specifically inquire into the adequacy of 

resources available in the budget for 

regulatory activities; (b) meet regularly 

with Phlx’s chief regulatory officer in 

executive session; and (c) be informed 

about the compensation and promotion 

or termination of the chief regulatory 

officer and the reasons therefor.16 The 

committee shall consist of three 

members, each of whom shall be an 

independent governor.17

Phlx believes 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 Phlx 

Board to maintain its own independent 

oversight over Phlx’s controls and 

internal audit matters relating to Phlx’s 

operations. In this regard, Phlx notes 

that its regulatory oversight committee, 

like the NASDAQ Exchange’s regulatory 

oversight committee, will have broad 

authority to oversee the adequacy and 

effectiveness of Phlx’s regulatory and 

self-regulatory organization 

responsibilities, and will therefore be 

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, which 

performs internal audit functions for all 

NASDAQ OMX subsidiaries, to report to 

the Phlx Board on all internal audit 

matters relating to Phlx. This practice 

will be formally reflected in the 

Department’s written procedures, which 

will now direct such reports to the 

regulatory oversight committee. In 

addition, to ensure that the Phlx Board 

retains authority to direct the 

Department’s activities with respect to 

Phlx, the Department’s written 

procedures will be amended to stipulate 

that the Phlx 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 Phlx 

regulatory oversight committee and the 

NASDAQ OMX audit committee. 

Finally, although language regarding the 

audit committee’s authority to conduct 

special reviews of any alleged improper 

conduct is being removed, Phlx believes 

that such authority is inherent in the 

powers of its Board, the NASDAQ OMX 

Board, and their respective committees. 

Accordingly, retaining this language for 

a specific committee is unnecessary.18

Although the position of chief 

regulatory officer has long existed, Phlx 

has concluded that the position should 

be formally described in the By-Laws. 

Accordingly, new Section 5–6 of the ByLaws will provide that the chief 

regulatory officer will have general 

supervision of Phlx’s regulatory 

operations, including the responsibility 

for overseeing its surveillance, 

examination, and enforcement functions 

and for administering any regulatory 

services agreements with another selfregulatory organization to which Phlx is 

a party. The chief regulatory officer 

shall meet with the regulatory oversight 

committee in executive session at 

regularly scheduled meetings, and at 

any time upon request of the chief 

regulatory officer or any member of the 

committee. 

Phlx 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.19

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 Phlx 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 former Chief 

Executive Officer of Phlx was also an 

‘‘executive officer’’ of NASDAQ OMX 

within the meaning of NASDAQ 

Exchange Rule 4350.20 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 


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40268 Federal Register / Vol. 74, No. 153 / Tuesday, August 11, 2009 / Notices 

21Two seats on the Phlx Board are reserved for 

the Chief Executive Officer and an officer, designee, 

director, or employee of NASDAQ OMX. To the 

extent that these Governors are officers or 

employees of both Phlx and NASDAQ OMX, they 

would be permitted to participate in discussions 

concerning compensation of Phlx employees, since 

the Phlx Board would not be responsible for setting 

their compensation. They would, however, recuse 

themselves from a vote on the subject to allow the 

determination to be made by directors that are not 

officers or employees of Phlx. If one of these 

Governors was an officer or employee of Phlx but 

not of NASDAQ OMX, that Governor would also 

absent himself or herself from any deliberations 

regarding his or her compensation. 

22See NASDAQ Exchange By-Laws, Article III, 

Section 6(d). 

23For the establishment of the Referee program, 

see Securities Exchange Act Release No. 54009 

(June 16, 2006), 71 FR 36592 (June 27, 2006) (SR– 

Phlx–2005–42). 

24See Rule 124.02(a)(i)–(iv). 

25See By-Law Article X, Section 10–9(d). 

26See By-Law Article I, Section 1–1(pp). 

27See proposed By-Law Article X, Section 10–10. 

28See NASDAQ Stock Market Rule 11890 and 

IM–11890–20 (Review by Panels of the MORC). 

solely of independent directors. 

Accordingly, the NASDAQ OMX board 

of directors and/or its compensation 

committee was legally required to 

establish the compensation for this 

individual. Although the individual 

recently resigned his positions with 

NASDAQ OMX and its subsidiaries in 

order to pursue another opportunity, it 

is likely that his successor as Chief 

Executive Officer of Phlx will serve in 

a similar position at NASDAQ OMX and 

therefore be subject to comparable 

compensation requirements. To the 

extent that policies, programs, and 

practices must also be established for 

any Phlx officers or employees who are 

not also NASDAQ OMX officers or 

employees, the Phlx Board will perform 

such actions without the use of a 

compensation committee (but subject to 

the recusal of the Chief Executive 

Officer and the Stockholder 

Governor).21

Replacement of the Exchange’s Referee 

With an Options Trade Review 

Committee 

The Exchange proposes to replace the 

current Referee process with an Options 

Trade Review Committee, which is 

similar to the processes of other 

exchanges, including the NASDAQ 

Exchange.22 As explained further below, 

the Exchange believes that this 

committee should effectively provide 

fair and neutral review of Options 

Exchange Officials’ rulings. 

Currently, the Exchange’s By-Laws 

and rules provide that the Referee is an 

Exchange employee (or independent 

contractor), supervised by the audit 

committee,23 who reviews Options 

Exchange Official rulings concerning 

the nullification and/or adjustment of 

transactions. In addition, the Referee 

can act in the capacity of an Options 

Exchange Official respecting initial 

rulings concerning requests for relief 

from the requirements of certain 

Exchange rules, Equity Floor Procedure 

Advices and Option Floor Procedure 

Advices.24

The Exchange proposes to eliminate 

the Referee and replace that function 

with an Options Trade Review 

Committee, which will review Options 

Exchange Official rulings. Even though 

the Referee was able to, the Options 

Trade Review Committee will not act in 

the capacity of an Options Exchange 

Official; its function will be limited to 

reviewing such rulings. 

In order to implement the Options 

Trade Review Committee, the Exchange 

is proposing to delete the By-Law 

provision that currently vests 

supervision over the Referee in the audit 

committee and generally defines the 

Referee’s role and background.25

Because the Exchange is proposing to 

eliminate its audit committee, and 

because appeals will now be handled by 

a committee, rather than an exchange 

employee (or independent contractor), 

the Exchange believes that the Options 

Trade Review Committee should be 

sufficiently neutral and independent of 

the regulatory processes and Options 

Exchange Officials. The Options Trade 

Review Committee will be appointed by 

the Board pursuant to new By-Law 

Article X, Section 10–10 as a standing 

committee of the Board and shall 

include a number of Member 

Representative members 26 that is equal 

to at least 20 percent of the total number 

of members of the Committee; 

furthermore, no more than 50 percent of 

its members shall be engaged in market 

making activity or employed by an 

Exchange Member Organization whose 

revenues from market making activity 

exceed ten percent of its total 

revenues.27

In addition, the Exchange proposes to 

amend various rules that refer to the 

Referee, including Rule 124, which 

currently outlines in detail the 

responsibilities of the Referee. 

Specifically, Rule 124 is being amended 

to establish the Options Trade Review 

Committee’s role. In addition to the 

language in By-Law Article X, Section 

10–10, proposed new language in Rule 

124 will state that the Options Trade 

Review Committee may act through a 

panel with a minimum of three 

Committee members, of which no more 

than 50% can be engaged in market 

making activity or employed by an 

Exchange Member Organization whose 

revenues from market making activity 

exceed ten percent of its total 

revenues.28 The Exchange anticipates 

that in light of the time sensitivity of 

rendering decisions in the trading 

context, neither the entire Options 

Trade Review Committee nor a quorum 

thereof should be required. The 

Exchange also anticipates that the panel 

will be selected by Exchange regulatory 

staff from the Committee members on a 

rotating basis, taking into consideration 

availability and prompt response as well 

as frequency of service, keeping in mind 

the importance of assembling a panel 

quickly. The staff is likely to use 

electronic means to do so, and the 

panels would convene via conference 

call. In addition, all appeals will be 

presented to the panel on an anonymous 

basis to reduce the risk of conflict or 

bias. The staff would provide to the 

panel a verbal and/or written 

information packet containing relevant 

documents. Member firm-identifying 

information within the packet would be 

redacted to make it difficult or 

impossible to identify the parties to the 

appeal. Regulatory staff will present the 

information included in the kit to the 

participants anonymously, which may 

include written information provided by 

any parties to the appeal. 

Commentary .02 to Rule 124 is 

proposed to be deleted, because it 

details the role of the Referee. The 

details regarding who can serve as 

Referee, how the Referee is appointed, 

designation of a Backup Referee, what 

additional functions the Referee can 

perform, and how the Referee is 

supervised and evaluated are no longer 

needed. 

Other than the role of the Referee, 

most aspects of the review process in 

Rule 124 are not being changed; for 

example, the time period to request a 

review, the fee for a review that sustains 

the ruling, and that rulings may be 

sustained, overturned or modified all 

remain unchanged. Decisions of the 

Options Trade Review Committee, like 

the Referee’s decisions, would not be 

appealable. Because Advice F–27 

corresponds to Rule 124, corresponding 

changes to Advice F–27 are also 

proposed. 

Minor changes to Rule 124 include: (i) 

[sic] removing references to Referee 

decisions from Rule 124(b) in the 

sentence that deals with rulings being 

effective immediately and being 

complied with promptly, because the 

provision that Options Trade Review 

Committee decisions are effective 

immediately and must be complied with 

promptly will appear instead in the 

paragraph governing the Options Trade 


sroberts on DSKD5P82C1PROD with NOTICES
Federal Register / Vol. 74, No. 153 / Tuesday, August 11, 2009 / Notices 40269 

29Rule 1(pp) is also being amended to delete 

reference to the specific Web site address where the 

list of Options Exchange Officials is maintained, 

which has changed. The Exchange will continue to 

post the list on its Web site, but would prefer not 

to put the actual Web site address into the rule text. 

30 15 U.S.C. 78f(b). 

31 15 U.S.C. 78(b)(1). 

32 15 U.S.C. 78f(b)(5). 33 17 CFR 200.30–3(a)(12). 

Review Committee, in proposed subparagraph (d)(v). In addition, subparagraph (d)(vi) is proposed to be 

deleted, because it duplicates a 

provision in paragraph (b). The 

Exchange is deleting the provision that 

an Options Exchange Official that fails 

to make any ruling in accordance with 

Exchange rules may be subject to 

possible disciplinary action by the 

Exchange, because this provision 

governs the Exchange’s own personnel 

policies, which typically do not appear 

in exchange rules. 

Rule 1092 is also being changed to 

refer to the Options Trade Review 

Committee, rather than the Referee in 

paragraphs (f)(iv) and (g), which relate 

to requesting a review of obvious error 

and catastrophic error determinations. 

The changes to the remaining 

provisions are minor. Rule 1, 

Definitions, is being amended to state 

that the list of Options Exchange 

Officials will be maintained by the Chief 

Regulatory Officer rather than the 

Referee.29 Rule 163, Erroneous 

Transactions, is also being amended to 

replace the Referee with the Options 

Trade Review Committee, but, as a 

practical matter, is not significant, 

because the Exchange no longer 

operates an equity trading system for 

which Rule 163 was adopted, such that 

Rule 163 cannot currently be invoked. 

In summary, the Exchange believes 

that, under this proposal, the Options 

Trade Review Committee should further 

the goal of impartial, objective 

decisions, which should, in turn, result 

in fairness and certainty in the overall 

process of resolving trading disputes. 

2. Statutory Basis 

Phlx believes that its proposal is 

consistent with Section 6(b) of the Act 30

in general, and furthers the objectives 

of: (1) Section 6(b)(1) of the Act,31

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,32

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 eliminate two Board committees 

whose roles have been diminished by 

Phlx’s new status as a wholly owned 

subsidiary of NASDAQ OMX, thereby 

allowing governors 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. In 

addition, the creation of a regulatory 

oversight committee and the inclusion 

of the chief regulatory officer in the ByLaws will underscore the importance of 

Phlx’s regulatory function and 

specifically empower an independent 

committee of the Board to oversee 

regulation and meet regularly with the 

chief regulatory officer. Finally, the 

Exchange believes that replacing the 

Referee with a new Options Trade 

Review Committee should provide a 

prompt and objective process for 

reviewing rulings on trading disputes. 

B. Self-Regulatory Organization’s 

Statement on Burden on Competition 

The 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 

No written comments were either 

solicited or 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 Exchange consents, 

the Commission shall: (a) By order 

approve such 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: 

Electronic Comments 

• Use the Commission’s Internet 

comment form (http://www.sec.gov/ 

rules/sro.shtml); or 

• Send an e-mail to rulecomments@sec.gov. Please include File 

Number SR–Phlx–2009–59 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–Phlx–2009–59. 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–Phlx–2009–59 and should 

be submitted on or before September 1, 

2009. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.33

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. E9–19143 Filed 8–10–09; 8:45 am] 

BILLING CODE 8010–01–P 


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