Document ID: SEC-2019-1468-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The Nasdaq Stock Market, LLC
Posted Date: 2019-10-09T04:00Z

[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 rule-comments@sec.gov. 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