Document ID: SEC-2006-0310-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: Pacific Exchange, Inc.
Posted Date: 2006-03-10T05:00Z

[Federal Register: March 10, 2006 (Volume 71, Number 47)]
[Notices]               
[Page 12413-12419]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr10mr06-151]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53411; File No. SR-PCX-2006-21]

 
Self-Regulatory Organizations; Pacific Exchange, Inc.; Notice of 
Filing and Order Granting Accelerated Approval of Proposed Rule Change 
Relating to the Certificate of Incorporation of PCX Holdings, Inc.

March 3, 2006.
    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 March 3, 2006, the Pacific Exchange, Inc. (``PCX'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I and II below, which Items 
have been prepared by PCX. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons 
and is approving the proposal on an accelerated basis.
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    \1\ 1 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    PCX hereby submits to the Commission a proposed rule change to (x) 
further extend certain temporary exceptions from the voting and 
ownership limitations in the certificate of incorporation of PCX 
Holdings, Inc. (``PCXH''), a Delaware corporation and a parent company 
of PCX, originally approved by the Commission in an order issued on 
September 22, 2005 (the ``SEC Order'') \3\ and extended pursuant to 
certain subsequent rule filings,\4\ so as to allow: (a) Archipelago 
Holdings, Inc. (``Archipelago''), a Delaware corporation and the 
ultimate parent company of PCXH and PCX, to continue to (i) own Wave 
Securities, L.L.C. (``Wave'') and (ii) own and operate the ATS Inbound 
Router Function (as defined below) of Archipelago Trading Services, 
Inc. (``ATS'') and the Inbound Router Clearing Function (as defined 
below) of Archipelago Securities, L.L.C. (``Archipelago Securities''); 
and (b) Gerald D. Putnam, Chairman and Chief Executive Officer of 
Archipelago (``Mr. Putnam''), to own in excess of 5% of Terra Nova 
Trading, L.L.C. (``TNT''), in each case until March 31, 2006, and (y) 
to allow Archipelago Securities to provide certain transition services 
to Order Execution Services Holdings, Inc. (``OES'') and, in each case 
of (x) and (y), subject to the conditions set forth in this proposed 
rule filing.
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    \3\ See Securities Exchange Act Release No. 52497 (September 22, 
2005), 70 FR 56949 (September 29, 2005) (the ``SEC Order'').
    \4\ See Securities Exchange Act Release No. 53034 (December 28, 
2005), 71 FR 636 (January 5, 2006) (the ``First Extension Notice'') 
and Securities Exchange Act Release No. 53202 (January 31, 2006), 71 
FR 6530 (February 8, 2006) (the ``Second Extension Notice'').
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II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, PCX 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 statements may be examined at the places specified in 
Item III below. PCX 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
a. PCXH Acquisition and the Amendment of the PCXH Certificate of 
Incorporation
    Archipelago operates the Archipelago Exchange (``ArcaEx''), an 
open, all-electronic stock market for the trading of equity securities 
that operates as a facility of PCX. On September 26, 2005, Archipelago 
completed its acquisition of PCXH and all of its wholly-owned 
subsidiaries, including PCX and PCXE (the ``PCXH Acquisition''). The 
PCXH Acquisition was accomplished by way of a merger of PCXH with a 
wholly-owned subsidiary of Archipelago, with PCXH being the surviving 
corporation in the merger and becoming a wholly-owned subsidiary of 
Archipelago.
    The certificate of incorporation of PCXH (as amended to date, the 
``PCXH Certificate of Incorporation'') contains various ownership and 
voting restrictions on PCXH's capital stock, which are designed to 
safeguard the independence of the self-regulatory functions of PCX and 
to protect the Commission's oversight responsibilities. In order to 
allow Archipelago to own

[[Page 12414]]

100% of the capital stock of PCXH, prior to the completion of the PCXH 
Acquisition, PCX filed with the Commission a proposed rule change which 
sought to, among other things, amend the PCXH Certificate of 
Incorporation to create an exception from the voting and ownership 
restrictions for Archipelago and certain of its related persons (the 
``Original Rule Filing'').\5\ The Original Rule Filing, as amended by 
Amendment Nos. 1 and 2 thereto, was approved by the Commission on 
September 22, 2005 \6\ and the amended PCXH Certificate of 
Incorporation became effective on September 26, 2005, upon the closing 
of the PCXH Acquisition.
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    \5\ See Pacific Exchange, Inc., Proposed Rule Change Relating to 
the Certificate of Incorporation of PCX Holdings, Inc., PCX Rules, 
and Bylaws of Archipelago Holdings, Inc., File No. SR-PCX-2005-90 
(August 1, 2005).
    \6\ See SEC Order, supra note 3.
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    Article Nine of the PCXH Certificate of Incorporation provides that 
no Person,\7\ either alone or together with its Related Persons,\8\ may 
own, directly or indirectly, shares constituting more than 40% of the 
outstanding shares of any class of PCXH capital stock,\9\ and that no 
Person, either alone or together with its Related Persons who is a 
trading permit holder of PCX or an equities trading permit holder of 
PCXE, may own, directly or indirectly, shares constituting more than 
20% of any class of PCXH capital stock.\10\ Furthermore, the PCXH 
Certificate of Incorporation provides that, for so long as PCXH 
controls, directly or indirectly, PCX, no Person, either alone or with 
its Related Persons, may directly or indirectly vote or cause the 
voting of shares of PCXH capital stock or give any proxy or consent 
with respect to shares representing more than 20% of the voting power 
of the issued and outstanding PCXH capital stock.\11\ The PCXH 
Certificate of Incorporation also places limitations on the right of 
any Person, either alone or with its Related Persons, to enter into any 
agreement with respect to the withholding of any vote or proxy.\12\
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    \7\ ``Person'' is defined to mean an individual, partnership 
(general or limited), joint stock company, corporation, limited 
liability company, trust or unincorporated organization, or any 
governmental entity or agency or political subdivision thereof. PCXH 
Certificate of Incorporation, Article Nine, section 1(b)(iv).
    \8\ The term ``Related Person,'' as defined in the PCXH 
Certificate of Incorporation, means (i) with respect to any person, 
all ``affiliates'' and ``associates'' of such person (as such terms 
are defined in Rule 12b-2 under the Act); (ii) with respect to any 
person constituting a trading permit holder of PCX or an equities 
trading permit holder of PCXE, any broker dealer with which such 
holder is associated; and (iii) any two or more persons that have 
any agreement, arrangement or understanding (whether or not in 
writing) to act together for the purpose of acquiring, voting, 
holding or disposing of shares of the capital stock of PCXH. PCXH 
Certificate of Incorporation, Article Nine, section 1(b)(iv).
    \9\ PCXH Certificate of Incorporation, Article Nine, Section 
1(b)(i). However, such restriction may be waived by the Board of 
Directors of PCXH pursuant to an amendment to the Bylaws of PCXH 
adopted by the Board of Directors, if, in connection with the 
adoption of such amendment, the Board of Directors adopts a 
resolution stating that it is the determination of such Board that 
such amendment will not impair the ability of PCX to carry out its 
functions and responsibilities as an ``exchange'' under the Act and 
is otherwise in the best interests of PCXH and its stockholders and 
PCX, and will not impair the ability of the Commission to enforce 
said Act, and such amendment shall not be effective until approved 
by said Commission; provided that the Board of Directors of PCXH 
shall have determined that such Person and its Related Persons are 
not subject to any applicable ``statutory disqualification'' (within 
the meaning of section 3(a)(39) of the Act). PCXH Certificate of 
Incorporation, Article Nine, sections 1(b)(i)(B) and 1(b)(i)(C).
    \10\ Id., Article Nine, section 1(b)(ii).
    \11\ Id., Article Nine, section 1(c).
    \12\ Id.
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    PCX proposed and the Commission approved an exception from the 
ownership and voting limitations described above to add a new paragraph 
at the end of Article Nine of the PCXH Certificate of Incorporation, 
which provides that for so long as Archipelago directly owns all of the 
outstanding capital stock of PCXH, these ownership and voting 
limitations shall not be applicable to the ownership and voting of 
shares of PCXH by (i) Archipelago, (ii) any Person which is a Related 
Person of Archipelago, either alone or together with its Related 
Persons, and (iii) any other Person to which Archipelago is a Related 
Person, either alone or together with its Related Persons.\13\ These 
exceptions to the ownership and voting limitations, however, shall not 
apply to any ``Prohibited Persons,'' \14\ which is defined to mean any 
Person that is, or that has a Related Person that is (i) an OTP Holder 
or an OTP Firm (as defined in the rules of PCX) \15\ or (ii) an ETP 
Holder (as defined in the rules of PCXE),\16\ unless such Person is 
also a ``Permitted Person'' under the PCXH Certificate of 
Incorporation.\17\ The PCXH Certificate of Incorporation further 
provides that any Prohibited Person not covered by the definition of a 
Permitted Person who is subject to and exceeds the voting and ownership 
limitations imposed by Article Nine as of the date of the closing of 
the PCXH Acquisition shall be permitted to exceed the voting and 
ownership limitations imposed by Article Nine only to the extent and 
for the time period approved by the Commission.\18\
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    \13\ Id., Article Nine, section 4.
    \14\ Id.
    \15\ PCX rules define an ``OTP Holder'' to mean any natural 
person, in good standing, who has been issued an Options Trading 
Permit (``OTP'') by the Exchange for effecting approved securities 
transactions on the Exchange's trading facilities, or has been named 
as a Nominee. PCX Rule 1.1(q). The term ``Nominee'' means an 
individual who is authorized by an ``OTP Firm'' (a sole 
proprietorship, partnership, corporation, limited liability company 
or other organization in good standing who holds an OTP or upon whom 
an individual OTP Holder has conferred trading privileges on the 
Exchange's trading facilities) to conduct business on the Exchange's 
trading facilities and to represent such OTP Firm in all matters 
relating to the Exchange. PCX Rule 1.1(n).
    \16\ PCXE rules define an ``ETP Holder'' to mean any sole 
proprietorship, partnership, corporation, limited liability company 
or other organization in good standing that has been issued an 
Equity Trading Permit, a permit issued by the PCXE for effecting 
approved securities transactions on the trading facilities of PCXE. 
PCXE Rule 1.1(n).
    \17\ ``Permitted Person'' is defined to mean: (A) Any broker or 
dealer approved by the Commission after June 20, 2005 to be a 
facility (as defined in section 3(a)(2) of the Act) of PCX; (B) any 
Person that has been approved by the Commission prior to it becoming 
subject to the provisions of Article Nine of the PCXH Certificate of 
Incorporation with respect to the voting and ownership of shares of 
PCXH capital stock by such Person; and (C) any Person that is a 
Related Person of Archipelago solely by reason of beneficially 
owning, either alone or together with its Related Persons, less than 
20% of the outstanding shares of Archipelago capital stock. PCXH 
Certificate of Incorporation, Article Nine, section 4.
    \18\ Id.
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b. Wave
    Wave is an introducing broker for Archipelago's institutional 
customers and provides such customers with access to ArcaEx and other 
market centers. Because Wave, a broker-dealer and an ETP Holder of 
PCXE, is a wholly-owned subsidiary and, consequently, a Related Person, 
of Archipelago, it falls within the definition of ``Prohibited 
Persons'' under the PCXH Certificate of Incorporation. Consequently, 
absent an exception, Archipelago's ownership of PCXH would cause Wave, 
as an ETP Holder, to exceed the voting and ownership limitations 
imposed by Article Nine of the PCXH Certificate of Incorporation. 
Therefore, in connection with the PCXH Acquisition, PCX requested a 
temporary exception from the ownership and voting limitations in the 
PCX Certificate of Incorporation for Archipelago's ownership of Wave 
until December 31, 2005, subject to the condition that during that 
interim period Archipelago would continue to maintain and comply with 
its current information barriers between Wave, on the one hand, and 
PCX, PCXE and other subsidiaries of Archipelago that are

[[Page 12415]]

facilities of PCX or PCXE, on the other hand.\19\
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    \19\ See Original Rule Filing, supra note 5, at 36-37, and 
Amendment No. 2 to the Original Rule Filing (September 16, 2005) 
(``Amendment No. 2''), at 4.
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    The Commission approved PCX's rule proposal regarding Wave (the 
``Original Wave Exception'').\20\ In the SEC Order, the Commission 
stated that the affiliation of an exchange with one of its members that 
provides inbound access to the exchange--in direct competition with 
other members of the exchange--raises potential conflicts of interest 
between the exchange's regulatory responsibilities and its commercial 
interests, and the potential for unfair competitive advantage that the 
affiliated member could have by virtue of informational or operational 
advantages, or the ability to receive preferential treatment.\21\ 
However, noting that the conditions to be imposed during the interim 
period were designed to mitigate potential conflicts of interest and 
the potential for unfair competitive advantage, the Commission 
concluded that it would be appropriate and consistent with the Act to 
allow a limited, temporary exception for Archipelago to continue its 
ownership of Wave.\22\ In granting the approval for the Original Wave 
Exception, the Commission also noted that in addition to being a member 
of PCX, Wave is a member of the National Association of Securities 
Dealers, Inc. (``NASD''), a self-regulatory organization (``SRO'') not 
affiliated with Archipelago, and the NASD has been designated by the 
Commission as the ``Designated Examining Authority'' for Wave pursuant 
to Rule 17d-1 of the Act.\23\ Furthermore, during the interim period, 
Wave would continue to be covered by the scope of an agreement between 
NASD and PCX, which was entered into pursuant to Rule 17d-2 under the 
Act \24\ (the ``17d-2 Agreement'') and provides for a plan concerning 
the regulatory responsibilities of NASD with respect to certain members 
of PCX, including Wave.\25\
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    \20\ See SEC Order, supra note 3, at 56960.
    \21\ Id. at 56959.
    \22\ Id.
    \23\ Id. Pursuant to Rule 17d-1 under the Act, where a member of 
the Securities Investor Protection Corporation is a member of more 
than one SRO, the Commission shall designate to one of such 
organizations the responsibility of examining such member for 
compliance with the applicable financial responsibility rules. In 
making such designation, the Commission shall take into 
consideration the regulatory capabilities and procedures of the 
SROs, availability of staff, convenience of location, unnecessary 
regulatory duplication, and such other factors as the Commission may 
consider germane to the protection of investors, the cooperation and 
coordination among SROs, and the development of a national market 
system for the clearance and settlement of securities transactions. 
17 CFR 240.17d-1.
    \24\ Rule 17d-2 under the Act provides that any two or more SROs 
may file with the Commission a plan for allocating among such SROs 
the responsibilities to receive regulatory reports from persons who 
are members or participants of more than one of such SROs to examine 
such persons for compliance, or to enforce compliance by such 
persons, with specified provisions of the Act, the rules and 
regulations thereunder, and the rules of such SROs, or to carry out 
other specified regulatory functions with respect to such persons. 
17 CFR 240.17d-2.
    \25\ See SEC Order, supra note 3, at 56959.
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    In accordance with the terms of the Original Wave Exception, 
Archipelago has been working to sell its ownership interests in Wave. 
Due to uncertainties in the timing of the negotiations regarding the 
sale, on December 19, 2005, the Exchange submitted a proposed rule 
filing (the ``Original Extension Rule Filing'') requesting an extension 
of the Original Wave Exception to January 31, 2006, subject to the same 
conditions as applied to the Original Wave Exception described 
above.\26\ The extension took effect immediately upon the filing of the 
Original Extension Rule Filing.\27\ On January 19, 2006, Archipelago 
entered into a definitive agreement for the sale of Wave to Merrill 
Lynch.\28\ The definitive agreement conditions the sale on the 
satisfaction of a number of closing conditions, including the receipt 
of certain regulatory approvals. Because of uncertainties in the timing 
of the regulatory approvals, on January 27, 2006, the Exchange 
submitted another proposed rule filing (the ``Second Extension Rule 
Filing'') requesting a further extension of the Original Wave Exception 
to the earlier of (x) the closing date of the merger of Archipelago and 
the New York Stock Exchange, Inc. (the ``Archipelago NYSE Merger'') 
\29\ and (y) March 31, 2006, subject to the same conditions as applied 
to the Original Wave Exception described above. \30\ The second 
extension took effect immediately upon the filing of the Second 
Extension Rule Filing.\31\
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    \26\ See Pacific Exchange, Inc., Proposed Rule Change Relating 
to the Certificate of Incorporation of PCX Holdings, Inc., File No. 
SR-PCX-2005-139 (December 19, 2005), as amended by Amendment No. 1 
thereto (December 23, 2005).
    \27\ See First Extension Notice, supra note 4, at 640.
    \28\ Merrill Lynch is neither a Related Person of Archipelago 
nor a ``Prohibited Person'' under the PCXH Certificate of 
Incorporation.
    \29\ The closing of the Archipelago NYSE Merger is currently 
expected to occur on March 7, 2006.
    \30\ See Pacific Exchange, Inc., Proposed Rule Change Relating 
to the Certificate of Incorporation of PCX Holdings, Inc., File No. 
SR-PCX-2006-04 (January 27, 2006).
    \31\ See the Second Extension Notice, supra note 4, at 6534.
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c. ATS Inbound Router Function and the Inbound Router Clearing Function
    Archipelago currently owns ATS, a wholly-owned subsidiary that is a 
broker-dealer and an ETP Holder of PCXE. The business of ATS consists 
of, among other things, acting as an introducing broker for non-ETP 
Holder broker or dealer clients for securities traded on ArcaEx (the 
``ATS Inbound Router Function''). Archipelago Securities, a wholly-
owned subsidiary of Archipelago, is a registered broker-dealer, a 
member of the NASD and an ETP Holder. In addition to its other 
functions, Archipelago Securities provides clearing functions for 
trades executed by the ATS Inbound Router Function (the ``Inbound 
Router Clearing Function'').
    Because ATS, a broker-dealer and an ETP Holder of PCXE, is a 
wholly-owned subsidiary and, consequently, a Related Person, of 
Archipelago, it falls within the definition of ``Prohibited Persons'' 
under the PCXH Certificate of Incorporation. Consequently, absent an 
exception, Archipelago's ownership of PCXH would cause ATS to exceed 
the voting and ownership limitations imposed by Article Nine of the 
PCXH Certificate of Incorporation. Likewise, because Archipelago 
Securities, a broker-dealer and an ETP Holder of PCXE, is a wholly-
owned subsidiary and, consequently, a Related Person, of Archipelago, 
and the approvals of Archipelago Securities set forth elsewhere in the 
SEC Order were limited in scope and did not include its Inbound Router 
Clearing Function, it falls within the definition of ``Prohibited 
Persons'' under the PCXH Certificate of Incorporation. Consequently, 
absent an exception, Archipelago's ownership of PCXH would cause 
Archipelago Securities to exceed the voting and ownership limitations 
imposed by Article Nine of the PCXH Certificate of Incorporation.
    Therefore, in connection with the PCXH Acquisition, PCX requested a 
temporary exception from the ownership and voting limitations in the 
PCXH Certificate of Incorporation for Archipelago's ownership and 
operation of the ATS Inbound Router Function and the Inbound Router 
Clearing Function until the earlier of (i) the closing date of the 
Archipelago NYSE Merger and (ii) March 31, 2006, subject to the 
following conditions: (1) The revenues derived by Archipelago from the 
ATS Inbound Router Function will not exceed 7% of the consolidated 
revenues of Archipelago (determined on a quarterly basis); (2) the ATS 
Inbound Router Function will not accept any

[[Page 12416]]

new clients following the closing of Archipelago's acquisition of PCXH; 
and (3) Archipelago will continue to maintain and comply with its 
current information barrier between the ATS Inbound Router Function on 
the one hand and PCX, PCXE and the other subsidiaries of Archipelago 
that are facilities of PCX or PCXE on the other hand.\32\ The 
Commission approved PCX's rule proposal regarding the ATS Inbound 
Router Function and the Inbound Router Clearing Function (the 
``Original Inbound Router Exception'').\33\ In the SEC Order, the 
Commission stated that the affiliation of an exchange with one of its 
members that provides inbound access to the exchange--in direct 
competition with other members of the exchange--raises potential 
conflicts of interest between the exchange's regulatory 
responsibilities and its commercial interests, and the potential for 
unfair competitive advantage that the affiliated member could have by 
virtue of informational or operational advantages, or the ability to 
receive preferential treatment.\34\ However, noting that the conditions 
to be imposed during the interim period were designed to mitigate 
potential conflicts of interest and the potential for unfair 
competitive advantage, the Commission concluded that it would be 
appropriate and consistent with the Act to allow a limited, temporary 
exception for Archipelago to continue its ownership of the ATS Inbound 
Router Function and the Inbound Router Clearing Function.\35\ In 
granting the approval for the Original Inbound Router Exception, the 
Commission also noted that in addition to being a member of PCX, ATS is 
a member of the NASD and the NASD has been designated by the Commission 
as the ``Designated Examining Authority'' for ATS pursuant to Rule 17d-
1 of the Act.\36\ Furthermore, during the interim period, ATS would 
continue to be covered by the scope of the 17d-2 Agreement,\37\ which 
provides for a plan concerning the regulatory responsibilities of NASD 
with respect to certain members of PCX, including ATS.\38\
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    \32\ See Amendment No. 2, supra note 19, at 5-6.
    \33\ See SEC Order, supra note 3, at 56960.
    \34\ Id. at 56959.
    \35\ Id.
    \36\ Id. See supra note 23 for a description of Rule 17d-1 under 
the Act.
    \37\ See supra note 24.
    \38\ See SEC Order, supra note 3, at 56959.
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    In accordance with the terms of the Original Inbound Router 
Exception, Archipelago has been working to sell its ownership interest 
in the ATS Inbound Router Function. Due to uncertainties in the timing 
of the negotiations regarding the sale and the uncertainty of the 
closing date of the Archipelago NYSE Merger, in the Original Extension 
Rule Filing, as amended by Amendment No. 1 thereto, the Exchange 
requested an extension of the Original Inbound Router Exception to 
January 31, 2006, subject to the same conditions as applied to the 
Original Inbound Router Exception described above.\39\ The extension 
took effect immediately upon the filing of Amendment No. 1 to the 
Original Extension Rule Filing.\40\ On December 23, 2005, Archipelago 
entered into a definitive agreement for the sale of the ATS Inbound 
Router Function to OES.\41\ The definitive agreement conditions the 
sale on the satisfaction of a number of closing conditions, including 
the receipt of NASD and other regulatory approvals. In light of the 
fact that the sale of the ATS Inbound Router Function was unlikely to 
be consummated by January 31, 2006, in the Second Extension Rule 
Filing, the Exchange requested that the Original Inbound Router 
Exception be further extended to the earlier of (x) the closing date of 
the Archipelago NYSE Merger and (y) March 31, 2006, subject to the same 
conditions as applied to the Original Inbound Router Exception 
described above.\42\ The extension took effect immediately upon the 
filing of the Second Extension Rule Filing.\43\
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    \39\ See the Original Extension Rule Filing, supra note 26, at 
13-14.
    \40\ See the First Extension Notice, supra note 4, at 640.
    \41\ OES is neither a Related Person of Archipelago nor a 
``Prohibited Person'' under the PCXH Certificate of Incorporation.
    \42\ See the Second Extension Rule Filing, supra note 30, at 11-
14.
    \43\ See the Second Extension Notice, supra note 4, at 6534.
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d. TNT
    TNT is a wholly-owned subsidiary of TAL Financial Services, LLC 
(``TAL'') and Mr. Putnam indirectly owns a 40% interest in TAL. 
Accordingly, Mr. Putnam indirectly owns in excess of 5% of TNT. The 
management committee of TAL performs on behalf of TNT the functions 
usually associated with a board of directors and executive committee of 
a corporation. Mr. Putnam is one of the five members of the TAL 
management committee. Because TNT, a broker-dealer and an ETP Holder of 
PCXE, is a Related Person of Archipelago by virtue of Mr. Putnam's 
ownership of in excess of 5% of TNT and service as a member of the 
management committee of TAL, it falls within the definition of 
``Prohibited Persons'' under the PCXH Certificate of Incorporation. 
Consequently, absent an exception, Archipelago's ownership of PCXH 
would cause TNT to exceed the voting and ownership limitations imposed 
by Article Nine of the PCXH Certificate of Incorporation. Therefore, in 
connection with the PCXH Acquisition, the Commission approved the 
Exchange's request for a temporary exception for Mr. Putnam to continue 
to own in excess of 5% of TNT and continue to serve as a director of 
TAL until December 31, 2005 (the ``Original TNT Exception'').\44\ In 
the SEC Order, the Commission stated that it believes that such a 
temporary exception is appropriate and consistent with the Act because 
it will eliminate the affiliation between TNT and Archipelago but allow 
Mr. Putnam a reasonable amount of time to effectuate such actions 
necessary to eliminate the affiliation.\45\
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    \44\ See SEC Order, supra note 3, at 56960-61.
    \45\ Id. at 56960.
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    Mr. Putnam has been working to eliminate the affiliation with TNT. 
In light of the fact that the sale of Mr. Putnam's interest in TNT was 
unlikely to be consummated by December 31, 2005, in the Original 
Extension Rule Filing, as amended by Amendment No. 1 thereto, the 
Exchange also requested an extension of the Original TNT Exception to 
January 31, 2006.\46\ The extension took effect immediately upon the 
filing of Amendment No. 1 to the Original Extension Rule Filing.\47\ In 
the Second Extension Rule Filing, the Exchange requested that the 
Original TNT Exception be further extended to the earlier of (x) the 
closing date of the Archipelago NYSE Merger and (y) March 31, 2006.\48\ 
The extension took effect immediately upon the filing of the Second 
Extension Rule Filing.\49\
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    \46\ See the Original Extension Rule Filing, supra note 26, at 
15-16.
    \47\ See the First Extension Notice, supra note 4, at 640.
    \48\ See the Second Extension Rule Filing, supra note 30, at 14-
15.
    \49\ See the Second Extension Notice, supra note 4, at 6534.
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e. Further Extensions of the Temporary Exceptions
i. Wave
    Since the execution of the definitive agreement with Merrill Lynch 
regarding the sale of Wave, Archipelago has been working to complete 
the sale as soon as possible upon satisfaction of the closing 
conditions contemplated by the agreement. It is unlikely that the sale 
will be completed before the expected closing date of the Archipelago 
NYSE Merger because of the regulatory approvals required in order to 
complete

[[Page 12417]]

the transaction. Such approvals, however, are currently expected to be 
received by early March 2006 and Archipelago would then close the sale 
as soon as practicable thereafter. To that end, the Exchange hereby 
proposes to further extend the Original Wave Exception to March 31, 
2006, subject to the same conditions as applied to the Original Wave 
Exception described above. In requesting such extension, Archipelago 
and the Exchange note that the NASD is the ``Designated Examining 
Authority'' for Wave pursuant to Rule 17d-1 of the Act. Furthermore, 
during the interim period, Wave would continue to be covered by the 
scope of the 17d-2 Agreement, which provides for a plan concerning the 
regulatory responsibilities of NASD with respect to certain members of 
PCX, including Wave. Archipelago and the Exchange believe that this 
extension would be in keeping with the policy justifications for the 
Original Wave Exception and the Original Wave Extension outlined above, 
while allowing Archipelago to complete the sale of Wave.
ii. ATS Inbound Router Function and the Inbound Router Clearing 
Function
    Since the execution of the definitive agreement with OES regarding 
the sale of the ATS Inbound Router Function, Archipelago has been 
working to complete the sale as soon as possible upon satisfaction of 
the closing conditions contemplated by the agreement. It is unlikely 
that the sale will be completed before the expected closing date of the 
Archipelago NYSE Merger because of the regulatory approvals required in 
order to complete the transaction. Such approvals, however, are 
currently expected to be received by early March 2006 and Archipelago 
would then close the sale as soon as practicable thereafter. To that 
end, the Exchange hereby proposes to further extend the Original 
Inbound Router Exception to March 31, 2006, subject to the same 
conditions as applied to the Original Inbound Router Exception 
described above. In requesting such extension, Archipelago and the 
Exchange note that the NASD is the ``Designated Examining Authority'' 
for ATS pursuant to Rule 17d-1 of the Act. Furthermore, during the 
interim period, ATS would continue to be covered by the scope of the 
17d-2 Agreement, which provides for a plan concerning the regulatory 
responsibilities of NASD with respect to certain members of PCX, 
including ATS. Archipelago and the Exchange believe that this extension 
would be in keeping with the policy justifications for the Original 
Inbound Router Exception and the Original Inbound Router Extension 
outlined above, while allowing Archipelago to complete the sale of the 
ATS Inbound Router Function.
iii. TNT
    Since the approval of the Original TNT Exception, Mr. Putnam has 
been working in good faith to sell his interest in TNT to at or below 
the 5% level. In light of the fact that the sale of Mr. Putnam's 
interest in TNT is unlikely to be consummated before the expected 
closing date of the Archipelago NYSE Merger, the Exchange hereby 
proposes to extend the Original TNT Exception to March 31, 2006, 
subject to the following conditions which shall apply during that 
period. First, Mr. Putnam shall resign as a member of the management 
committee of TAL. Second, Mr. Putnam shall continue to abstain, as he 
has abstained in the past, from directing the respective day-to-day 
operations of TAL or TNT or otherwise participating in the respective 
management or businesses of TAL or TNT. Third, Mr. Putnam shall not 
exercise any voting rights with respect to any equity interests of TAL 
or in excess of 5% of voting rights with respect to TNT. The second and 
third conditions, however, shall be subject to the following exception: 
Mr. Putnam shall be permitted to act or vote in a manner otherwise 
prohibited by such condition if Mr. Putnam's action or exercise of 
voting rights would be necessary to approve and consummate the sale of 
Mr. Putnam's interest in TNT in accordance with the foregoing.
    In requesting such extension, Archipelago and the Exchange note 
that the NASD is the ``Designated Examining Authority'' for TNT 
pursuant to Rule 17d-1 of the Act. Furthermore, during the interim 
period, TNT would continue to be covered by the scope of the 17d-2 
Agreement, which provides for a plan concerning the regulatory 
responsibilities of NASD with respect to certain members of PCX, 
including TNT. Archipelago and the Exchange believe that this extension 
would be in keeping with the policy justifications for the Original TNT 
Exception and the Original TNT Extension outlined above, while allowing 
Mr. Putnam a reasonable amount of time to effectuate the actions 
necessary to eliminate the affiliation between TNT and Archipelago.
iv. Inbound Router Transition Services
    In connection with the sale of the ATS Inbound Router Function to 
OES, in order to ensure the successful integration of the ATS Inbound 
Router Function into OES and to maintain consistency in customer 
services, Archipelago has agreed to provide certain transition services 
to OES. Specifically, Archipelago Securities will continue to provide 
clearing functions for trades executed by existing customers of the ATS 
Inbound Router Function for a period of 90 days after the sale of the 
ATS Inbound Router Function to OES (the ``Inbound Router Transition 
Services''). As described in Item 3.1.c, because Archipelago Securities 
is a broker-dealer and an ETP Holder of PCXE, it is deemed a Related 
Person of Archipelago under the PCXH Certificate of Incorporation. 
Because the exceptions granted in the SEC Order and the exceptions 
requested elsewhere in this rule filing with respect to Archipelago 
Securities are limited in scope, absent a specific exception for the 
Inbound Router Transition Services, Archipelago Securities would fall 
within the definition of ``Prohibited Persons'' under the PCXH 
Certificate of Incorporation. Therefore, the Exchange hereby requests 
the Commission's approval of a temporary exception for Archipelago 
Securities, who would be subject to and exceed the ownership and voting 
limitations imposed by the PCXH Certificate of Incorporation, so that 
Archipelago Securities would be permitted to exceed such limitations to 
the following extent and for the following time period: Archipelago 
Securities may, for a period of up to 90 days following the closing of 
the sale of the ATS Inbound Router Function to OES, provide the Inbound 
Router Transition Services to OES, subject to the condition that 
Archipelago Securities may only provide such services to existing 
customers of the ATS Inbound Router Function.
2. Statutory Basis
    The Exchange believes that the proposed rule change in this filing 
is consistent with section 6(b) \50\ of the Act, in general, and 
furthers the objectives of section 6(b)(1),\51\ in particular, in that 
it enables the Exchange to be so organized so as to have the capacity 
to be able to carry out the purposes of the Act and to comply, and 
(subject to any rule or order of the Commission pursuant to section 
17(d) or 19(g)(2) of the Act) to enforce compliance by its exchange 
members and persons associated with its exchange members, with the 
provisions of the Act, the rules and regulations thereunder, and the 
rules of the Exchange. The Exchange also believes that this filing 
furthers the objectives of

[[Page 12418]]

section 6(b)(5),\52\ in particular, because the rules summarized herein 
would create a governance and regulatory structure with respect to the 
operation of the equities and options business of PCX that is designed 
to help prevent fraudulent and manipulative acts and practices; to 
promote just and equitable principals of trade; to foster cooperation 
and coordination with persons engaged in regulating, clearing, 
settling, processing information with respect to, and facilitating 
transactions in securities; and 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.
---------------------------------------------------------------------------

    \50\ 15 U.S.C. 78f(b).
    \51\ 15 U.S.C. 78f(b)(1).
    \52\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

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

    Written comments on the proposed rule change were neither solicited 
nor received.

III. 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 rule-comments@sec.gov. Please include 

File Number SR-PCX-2006-21 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-PCX-2006-21. 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. Copies of such 
filing also will be available for inspection and copying at the 
principal office of the PCX. 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-PCX-2006-21 and should be submitted on or before March 
31, 2006.

IV. Discussion of Commission Findings and Order Granting Accelerated 
Approval of Proposed Rule Change

    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.\53\ In particular, the Commission finds that the proposal is 
consistent with section 6(b)(1) of the Act,\54\ which requires a 
national securities exchange to be so organized and have the capacity 
to be able to carry out the purposes of the Act and to enforce 
compliance by its members and persons associated with its members with 
the provisions of the Act, the rules or regulations thereunder, and the 
rules of the exchange. The Commission also finds that the proposal is 
consistent with section 6(b)(5) of the Act,\55\ which requires, among 
other things, that the rules of an exchange be designed to promote just 
and equitable principles of trade, to facilitate transactions in 
securities, to remove impediments to and perfect the mechanisms of a 
free and open market and a national market system, and, in general, to 
protect investors and the public interest.
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    \53\ In approving the proposed rule change, the Commission has 
considered its impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \54\ 15 U.S.C. 78f(b)(1).
    \55\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    Pursuant to section 19(b)(2) of the Act,\56\ the Commission may not 
approve any proposed rule change, or amendment thereto, prior to the 
thirtieth day after the date of publication of the notice thereof, 
unless the Commission finds good cause for so doing. The Commission 
hereby finds good cause for approving the proposed rule change prior to 
the thirtieth day after publishing notice thereof in the Federal 
Register pursuant to section 19(b)(2) of the Act.\57\
---------------------------------------------------------------------------

    \56\ 15 U.S.C. 78s(b)(2).
    \57\ Id.
---------------------------------------------------------------------------

    The Commission believes that the requested extensions for Wave, the 
ATS Inbound Router Function and the Inbound Router Clearing Function 
are consistent with the terms and conditions set forth in the SEC Order 
originally approving such exceptions on a temporary basis and the 
subsequent extensions of such exceptions, and, as such, do not raise 
any new or novel issues. The Commission notes that: (1) The requested 
extensions are limited in duration; (2) Archipelago has entered into 
definitive agreements for the sale of Wave and the ATS Inbound Router 
Function; and (3) the Exchange expects that such transactions will 
close in early March, but may not have closed prior to March 7, 2006, 
the anticipated closing date of the Archipelago NYSE Merger.\58\ 
Because the current exceptions are set to expire the earlier of (i) the 
closing date of the Archipelago NYSE Merger and (ii) March 31, 2006, 
the Commission believes that permitting PCX to extend the exceptions 
for Wave, the ATS Inbound Router Function and the Inbound Router 
Clearing Function until March 31, 2006 will permit Archipelago to avoid 
disruption of the operation of the services currently provided.
---------------------------------------------------------------------------

    \58\ See supra note 29.
---------------------------------------------------------------------------

    The current exception with respect to Mr. Putnam's ownership of TNT 
also is set to expire the earlier of (i) the closing date of the 
Archipelago NYSE Merger (which is intended to close on March 7, 2006) 
and (ii) March 31, 2006. The Exchange represents that, although Mr. 
Putnam has been working in good faith to reduce his stake in TNT, he 
will not be able to complete the sale of his interest in TNT before the 
expiration of the current exception. Thus, absent an extension, TNT 
would be in violation of the PCXH ownership and voting limitations. The 
Commission believes that the requested extension to permit Mr. Putnam 
to continue to own in excess of 5% of TNT until March 31, 2006, subject 
to certain conditions, is consistent with the Act and finds good cause 
to accelerate approval of such proposed rule change. The Commission 
notes that the extension is limited in scope and duration and is 
subject to

[[Page 12419]]

certain conditions that will apply during the extension period. 
Specifically, Mr. Putnam shall: (1) Resign as a member of the 
management committee of TAL; (2) continue to abstain from directing the 
day-to day operations of TAL or TNT or otherwise participate in the day 
to day operations of TAL or TNT; and (3) not exercise any voting rights 
with respect to any equity interests of TAL or in excess of 5% of 
voting rights with respect to TNT. The Commission believes that these 
conditions should serve to limit the potential for conflicts of 
interest during the interim period.
    The Commission also believes that the requested exception to allow 
Archipelago Securities to provide certain transition services to OES 
for a period of 90 days after the sale of the Inbound Router Function 
to OES, subject to the condition that Archipelago Securities may only 
provide such services to existing customers of the ATS Inbound Router 
Function, is consistent with the Act and the protection of investors 
and the public interest in that the provision of such services would 
facilitate the sale of the ATS Inbound Router Function and provide 
customers continuity of service during the transition period following 
such sale.
    For the foregoing reasons, the Commission finds that the proposed 
rule change is consistent with the requirements of the Act the rules 
and regulations thereunder, and finds that good cause exists to 
accelerate approval of the proposed rule change, pursuant to section 
19(b)(2) of the Act.\59\
---------------------------------------------------------------------------

    \59\ Id.
---------------------------------------------------------------------------

V. Conclusion

    It Is Therefore Ordered, pursuant to section 19(b)(2) of the 
Act,\60\ that the proposed rule change (SR-PCX-2006-21) is approved on 
an accelerated basis. Specifically, Archipelago may continue to own 
Wave, and may continue to own and operate the ATS Inbound Router 
Function and the Inbound Router Clearing Function, until March 31, 
2006, subject to the conditions described above; Mr. Putnam may 
continue to own in excess of 5% of TNT until March 31, 2006, subject to 
the conditions described above; and Archipelago Securities may provide 
transition services to OES as described above, subject to the 
conditions described above.
---------------------------------------------------------------------------

    \60\ Id.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\61\
---------------------------------------------------------------------------

    \61\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Jill M. Peterson,
Assistant Secretary.
[FR Doc. E6-3437 Filed 3-9-06; 8:45 am]

BILLING CODE 8010-01-P