34840 Federal Register / Vol. 74, No. 136 / Friday, July 17, 2009 / Notices 

10 17 CFR 200.30–3(a)(12). 

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

2 17 CFR 240.19b-4. 

3The Agreement includes and incorporates an 

exhibit designated as the By-Laws of the NASDAQ 

Stock Market LLC. Accordingly, the By-Laws are 

part of the Agreement. See Securities Exchange Act 

Release No. 59907 (May 12, 2009), 74 FR 23761 

(‘‘Notice’’), 23761 n.3. 

4See Notice, supra note 3. 

5See Notice, 74 FR at 23761. 

6Specifically, the Exchange would: reflect the 

name change of The Nasdaq Stock Market, Inc. to 

The NASDAQ OMX Group, Inc.; reflect the name 

change of National Association of Securities 

Dealers, Inc. to FINRA; correct typographical errors 

in the definition of ‘‘Industry member’’ in Article 

I of the By-Laws and in Section 6 of the Agreement; 

and redesignate the Agreement as the ‘‘Second 

Amended Limited Liability Company Agreement of 

The NASDAQ Stock Market LLC.’’ 

7 In approving this proposed rule change, the 

Commission notes that it has considered the 

proposed rule’s impact on efficiency, competition, 

and capital formation. See 15 U.S.C. 78c(f). 

8 15 U.S.C. 78f(b)(1). 

9 15 U.S.C. 78f(b)(3). 

10 15 U.S.C. 78f(b)(5). 

11Securities Exchange Act Release No. 55293 

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

(SR–NYSE–2006–120). 

12Specifically the NASDAQ Exchange states the 

NASDAQ OMX audit committee, described infra at 

n.13, 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 and, because NASDAQ OMX’s financial 

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–NYSEArca–2009–66 and 

should be submitted on or before 

August 7, 2009. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.10

Elizabeth M. Murphy, 

Secretary. 

[FR Doc. E9–17007 Filed 7–16–09; 8:45 am] 

BILLING CODE 8010–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–60276; File No. SR– 

NASDAQ–2009–042] 

Self-Regulatory Organizations; The 

NASDAQ Stock Market LLC; Order 

Approving Proposed Rule Change To 

Amend Its Limited Liability Agreement 

and By-Laws 

July 9, 2009. 

On April 29, 2009, The NASDAQ 

Stock Market LLC (‘‘NASDAQ 

Exchange’’ or ‘‘Exchange’’) 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 a proposed rule 

change to amend its Limited Liability 

Agreement (‘‘Agreement’’) and ByLaws.3 The proposed rule change was 

published for comment in the Federal 

Register on May 20, 2009.4 The 

Commission received no comments 

regarding the proposal. This order 

approves the proposed rule change. 

I. Description of the Proposed Rule 

Change 

Currently, the NASDAQ Exchange 

board and the board of its parent 

company, NASDAQ OMX Group, Inc. 

(‘‘NASDAQ OMX’’), maintain their own 

audit committee and management 

compensation committees. As more 

fully discussed in the Notice, the 

Exchange states that it has found the 

work of these committees to overlap 

substantially.5 As a result, the Exchange 

proposes to revise its Agreement to 

allow for the elimination of its audit and 

management compensation committees. 

The Exchange also proposes to amend 

the Agreement to allow for the 

elimination of its arbitration and 

mediation committee, provided that the 

NASDAQ Exchange’s arbitration and 

mediation program is operated by the 

Financial Industry Regulatory Authority 

(‘‘FINRA’’), which the NASDAQ 

Exchange states is currently the case. 

In addition, as discussed in the 

Notice, the Exchange proposes changes 

to its rules governing the selection of 

Member Representative Directors, as 

well as to update certain aspects of its 

Agreement.6

II. Discussion and Commission 

Findings 

After careful review, the Commission 

finds that the proposed rule change is 

consistent with the requirements of the 

Act and the rules and regulations 

thereunder applicable to a national 

securities exchange.7 In particular, the 

Commission finds that the proposed 

rule change is consistent with Section 

6(b)(1) of the Act,8 which requires a 

national securities exchange to be so 

organized and have the capacity to carry 

out the purposes of the Act and to 

comply, and to enforce compliance by 

its members and persons associated 

with its members, with the provisions of 

the Act. The Commission also finds that 

the proposed rule change is consistent 

with Section 6(b)(3) of the Act,9 which 

requires that the rules of a national 

securities exchange assure a fair 

representation of its members in the 

selection of its directors and 

administration of its affairs and provide 

that one or more directors shall be 

representative of issuers and investors 

and not be associated with a member of 

the exchange, broker, or dealer. The 

Commission further finds that the 

proposed rule change is consistent with 

Section 6(b)(5) of the Act,10 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. The Commission 

previously approved a structure in 

which certain committees of the board 

of directors of NYSE Euronext, 

including the audit and compensation 

committees, were authorized to perform 

functions for various subsidiaries, 

including the New York Stock 

Exchange, LLC (‘‘NYSE’’).11

A. Elimination of the Exchange’s Audit 

and Management Compensation 

Committees 

Currently, the NASDAQ Exchange 

audit committee is primarily charged 

with: (1) Oversight of the NASDAQ 

Exchange’s financial reporting; (2) 

oversight of the systems of internal 

controls established by management and 

the NASDAQ Exchange board, as well 

as the legal and compliance process; (3) 

selection and evaluation of independent 

auditors; and (4) direction and oversight 

of the internal audit function. The 

Exchange states that the responsibilities 

of the NASDAQ Exchange’s audit 

committee are fully duplicated 12 by the 

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Federal Register / Vol. 74, No. 136 / Friday, July 17, 2009 / Notices 34841 

statements are prepared on a consolidated basis that 

includes the financial results of NASDAQ OMX’s 

subsidiaries, including the Exchange, the NASDAQ 

OMX audit committee’s purview necessarily 

includes these subsidiaries. In addition, the 

NASDAQ OMX audit committee currently is 

charged with providing oversight over financial 

reporting and independent auditor selection for 

NASDAQ OMX and all of its subsidiaries, including 

the Exchange; and 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. See Notice, 74 FR at 

23761, 23762. 

13The NASDAQ OMX audit 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 and the 

listing rules 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. 

14See Notice, 74 FR at 23762. 

15See id. 

16 Id. 

17See NASDAQ Exchange By-Laws, Article I(j). 

Staff Directors are directors of the Exchange that are 

also serving as officers. Because the NASDAQ 

Exchange board would not be responsible for 

setting the compensation of any Staff Directors who 

are also officers of NASDAQ OMX, these directors 

would be permitted to participate in discussions 

concerning compensation of Exchange employees, 

but the Exchange states that they must 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 Exchange. The 

NASDAQ Exchange also states that, if a Staff 

Director is not also an employee of NASDAQ OMX, 

that Staff Director also must absent himself or 

herself from any deliberations regarding his or her 

compensation. 

18See Securities Exchange Act Release No. 55293 

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

(SR–NYSE–2006–120). 19See Notice, 72 FR at 23762, n.16. 

responsibilities of the NASDAQ OMX 

audit committee.13 In addition, the 

NASDAQ Exchange states that its 

regulatory oversight committee has 

broad authority to oversee the adequacy 

and effectiveness of its regulatory and 

self-regulatory organization 

responsibilities, and therefore is able to 

maintain oversight over internal 

controls in tandem with the NASDAQ 

OMX audit committee. Further, the 

NASDAQ Exchange states that the 

practice of NASDAQ OMX’s Internal 

Audit Department (‘‘Department’’),14

which performs internal audit functions 

for all NASDAQ OMX subsidiaries, is to 

report to the NASDAQ Exchange 

regulatory oversight committee on all 

internal audit matters relating to the 

NASDAQ Exchange will be formally 

reflected in the Department’s written 

procedures. The Exchange also 

represents that, to ensure that its 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.15

The Exchange also proposes to allow 

the elimination of its compensation 

committee, and to prescribe that the 

functions of that committee be 

performed by the NASDAQ OMX 

compensation committee or by the full 

NASDAQ Exchange board, when 

required. The NASDAQ OMX By-Laws 

provide that its compensation 

committee considers and recommends 

compensation policies, programs, and 

practices for employees of NASDAQ 

OMX. Many employees performing 

work for the NASDAQ Exchange are 

also employees of NASDAQ OMX, and 

certain senior officers of the NASDAQ 

Exchange are also officers of NASDAQ 

OMX and other NASDAQ OMX 

subsidiaries because their 

responsibilities relate to multiple 

entities within the NASDAQ OMX 

corporate structure.16 As a result, 

NASDAQ OMX establishes 

compensation and compensation policy 

for these employees. 

To the extent that policies, programs, 

and practices must be established for 

any NASDAQ Exchange officers or 

employees who are not also NASDAQ 

OMX officers or employees, the 

Exchange states that its board will 

perform such actions without the use of 

a compensation committee, subject to 

recusal by Staff Directors.17

The Commission notes that the 

proposed elimination of the NASDAQ 

Exchange audit and management 

compensation committees is comparable 

to a structure for the NYSE that the 

Commission previously considered and 

approved.18 The Commission finds that 

the proposed elimination of the 

NASDAQ Exchange’s audit and 

management compensation committees 

is consistent with the Act. 

B. Elimination of the NASDAQ 

Exchange’s Arbitration and Mediation 

Committee. 

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 

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. The 

Exchange states that, at this time, there 

is no meaningful role for this committee 

to play because the NASDAQ 

Exchange’s arbitration and mediation 

program presently is operated by 

FINRA. All information needed by the 

NASDAQ Exchange board or staff to 

evaluate the effectiveness of FINRA’s 

administration of the program is 

obtained through the Exchange’s 

oversight of FINRA’s performance 

through its authority under its 

regulatory services agreement to obtain 

reports from FINRA and to conduct 

audits. 

The Commission notes that neither 

the Exchange nor its predecessor (The 

Nasdaq Stock Market, Inc.) has ever 

operated a dispute resolution program 

that was not administered by FINRA or 

its predecessor (the National 

Association of Securities Dealers, 

Inc.).19 Therefore, no ongoing dispute 

will be affected by the elimination of 

this committee. In the addition, the 

Agreement, as revised, would continue 

to provide for the establishment of such 

a committee in the event that the 

NASDAQ Exchange in the future opts to 

establish an arbitration or mediation 

program that is not operated by FINRA 

in accordance with FINRA rules. The 

Commission therefore finds that the 

proposed rule change is consistent with 

the Act, as the Exchange will continue 

to be organized and have the capacity to 

carry out the purposes of the Act and to 

comply with and enforce compliance by 

its members and persons associated 

with its members with the provisions of 

the Act, the rules and regulations 

thereunder, and the rules of the 

Exchange. 

C. Selection of Member Representative 

Directors 

Under the Agreement, 20% of the 

Exchange’s directors are selected 

through a process in which the 

Exchange’s member nominating 

committee nominates a slate of 

candidates but members also have the 

opportunity to nominate alternative 

candidates. If no alternative candidates 

are 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. The Exchange 

proposes to prohibit a member, either 

alone or together with its affiliates, from 

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34842 Federal Register / Vol. 74, No. 136 / Friday, July 17, 2009 / Notices 

20 15 U.S.C. 78f(b)(3). 

21See Securities Exchange Act Release Nos. 

58324 (August 7, 2008), 73 FR 46936, 46940–41 

(August 12, 2008) (SR–BSE–2008–02, –23, –25, SR– 

BSECC–2001–01) and 58864 (October 27, 2008), 73 

FR65430 (November 3, 2009) (SR–BSE–2008–45). 

22 15 U.S.C. 78s(b)(2). 

23 17 CFR 200.30–3(a)(12). 

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

2 17 CFR 240.19b–4. 

3See Securities Exchange Act Release No. 34– 

56970 (December 14, 2007), 72 FR 72428 (December 

20, 2007) (SR–CBOE–2007–99). 

casting votes representing more than 

20% of the votes cast for a candidate, 

and to provide that any votes cast by the 

member, either alone or together with 

its affiliates in excess of the 20%, limit 

shall be disregarded. The Exchange also 

proposes to amend its By-Laws to 

provide that an Election Date is selected 

by the Exchange’s board on an annual 

basis, and that members only cast votes 

on such date if there is a Contested 

Election. The Commission finds that 

these changes are consistent with the 

Act, including Section 6(b)(3) of the 

Act,20 which requires that a national 

securities exchange assure the fair 

representation of its members in the 

selection of its directors and 

administration of its affairs. The 

Commission recently approved similar 

changes proposed by NASDAQ OMX 

BX, Inc.21

III. Conclusion 

It is therefore ordered, pursuant to 

Section 19(b)(2) of the Act,22 that the 

proposed rule change (SR–NASDAQ– 

2009–042) be, and it hereby is, 

approved. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.23

Elizabeth M. Murphy, 

Secretary. 

[FR Doc. E9–17005 Filed 7–16–09; 8:45 am] 

BILLING CODE 8010–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–60271; File No. SR–CBOE– 

2009–039] 

Self-Regulatory Organizations; 

Chicago Board Options Exchange, 

Incorporated; Notice of Proposed Rule 

Change and Amendment No. 1 Thereto 

To Extend the Delta Hedging 

Exemption From Equity Options 

Position Limits to Customers 

July 9, 2009. 

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 June 19, 

2009, the Chicago Board Options 

Exchange, Incorporated (‘‘Exchange’’ or 

‘‘CBOE’’) 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 8, 2009, CBOE filed 

Amendment No. 1 to the proposed rule 

change. 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 

CBOE proposes to amend 

Interpretation and Policy .04 to Rule 

4.11 to extend the delta hedging 

exemption from equity option position 

limits to customers whose accounts are 

carried by a member and who use the 

pricing model maintained and operated 

by The Options Clearing Corporation 

(‘‘OCC’’). Although the proposed rule 

change would not amend the text of 

Rule 4.12, the proposed change would 

impact that rule because Rule 4.12 

establishes exercise limits for an option 

at the same level as the option’s position 

limit under Rule 4.11. The text of the 

rule proposal is available on the 

Exchange’s Web site (http:// 

www.cboe.org/legal), at the Exchange’s 

Office of the Secretary and at the 

Commission. 

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 

self-regulatory organization 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 parts of such 

statements. 

A. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

1. Purpose 

On December 14, 2007, the SEC 

approved CBOE’s rule proposal to create 

a delta-based equity hedging exemption 

from equity options (stock options and 

options on exchange-traded funds) 

position limits (‘‘Exemption’’).3 Unlike 

traditional equity hedging, which 

requires a one-to-one hedge, delta 

hedging varies the number of shares of 

the underlying security used to hedge 

an options position based on the relative 

sensitivity of the value of the option 

contract to a change in the price of the 

underlying security. For example, a 

stock option contract with a delta of .5 

will move 50¢ for every $1.00 move in 

the underlying stock. 

The Exemption currently only permits 

members or non-member affiliates of a 

member that use a ‘‘permitted pricing 

model’’ (as defined in Rule 

4.11.04(c)(C)) to use the Exemption. The 

purpose of this filing is to extend the 

existing Exemption from equity option 

position limits to customers who use the 

pricing model maintained and operated 

by OCC. 

In support of this proposal, the 

Exchange states that the Exchange 

considered including customers when 

the scope of the original filing to create 

the Exemption was being contemplated. 

However, based on industry 

discussions, it was determined that a 

delta hedging exemption for customers 

would be proposed and phased in at a 

later time. Since the adoption of the 

Exemption over 18 months ago, 

customers have continued to express 

interest and have repeatedly requested 

that the Exchange seek to extend the 

Exemption to customers. During the 

time period during which the 

Exemption has been in effect, the 

Exchange has not encountered any 

problems and believes that the 

Exemption has been a useful tool for 

members and non-member affiliates. 

The Exchange believes that it is 

appropriate to extend the Exemption to 

customers after observing the positive 

and useful benefit it has had for 

members and non-member affiliates. 

The Exchange believes that extending 

the Exemption to customers in the 

current market environment is 

particularly relevant as the Exchange 

has seen a trending of customers 

holding positions overlying lowerpriced securities bumping up against 

current position limits. Extending the 

Exemption to customers would provide 

relief to these customers by recognizing 

this widely accepted method for risk 

management and would not result in an 

increase to their overall notational 

exposure. 

To affect the extension of the 

Exemption from equity options position 

limits to customers, the Exchange 

proposes to layer the term ‘‘customer’’ 

into the existing rule and proposes to 

codify separately the obligations of a 

customer using the Exemption. One key 

difference between members (and nonmember affiliates) and customers using 

the Exemption would be that customers 

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