Document ID: SEC-2008-1027-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ Stock Market LLC
Posted Date: 2008-07-23T04:00Z

[Federal Register: July 23, 2008 (Volume 73, Number 142)]
[Notices]               
[Page 42850-42852]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr23jy08-85]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58183; File No. SR-NASDAQ-2008-035]

 
Self-Regulatory Organizations; The NASDAQ Stock Market, LLC; 
Order Approving a Proposed Rule Change, as Modified by Amendment No. 1, 
To Amend the By-Laws of the NASDAQ OMX Group, Inc. in Connection With 
the Acquisitions of Boston Stock Exchange, Incorporated and 
Philadelphia Stock Exchange, Inc.

July 17, 2008.

I. Introduction

    On April 21, 2008, The NASDAQ Stock Market, LLC (``Nasdaq'') 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 
(``NASDAQ OMX By-Law Proposal'') to amend the by-laws (``NASDAQ OMX By-
Laws'') of its parent corporation, The NASDAQ OMX Group, Inc. (``NASDAQ 
OMX''). The NASDAQ OMX By-Law Proposal was published for comment in the 
Federal Register on May 8, 2008.\3\ The Commission received no comment 
letters regarding the NASDAQ OMX By-Law Proposal. On July 3, 2008, 
Nasdaq filed Amendment No. 1 to the NASDAQ OMX By-Law Proposal.\4\ This 
order approves the NASDAQ OMX By-Law Proposal, as modified by Amendment 
No. 1.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 57761 (May 1, 2008), 
73 FR 26182 (SR-NASDAQ-2008-035) (``NASDAQ OMX By-Law Proposal 
Notice'').
    \4\ In Amendment No. 1, Nasdaq proposes to correct typographical 
errors in the proposed amendments to NASDAQ OMX By-Laws Sections 
11.3 and 12.5. Because Amendment No. 1 is technical in nature, the 
Commission is not publishing it for comment.
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II. Discussion and Commission Findings

    NASDAQ OMX and the Boston Stock Exchange, Incorporated (``BSE''), a 
national securities exchange, have

[[Page 42851]]

entered into an agreement pursuant to which NASDAQ OMX would acquire 
all of the outstanding membership interests in BSE (``BSE 
Acquisition'').\5\ Also, NASDAQ OMX and the Philadelphia Stock 
Exchange, Inc., (``Phlx''), a national securities exchange, have 
entered into an agreement pursuant to which NASDAQ OMX would acquire 
all of the outstanding capital stock of Phlx (``Phlx Acquisition,'' 
together with the BSE Acquisition, the ``Acquisitions''). Today, the 
Commission approved proposed rule changes by Phlx in connection with 
the Phlx Acquisition, that include, among other things, the same 
amended NASDAQ OMX By-Laws that are the subject of this proposal by 
Nasdaq.\6\
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    \5\ NASDAQ OMX would not acquire BSE's interest in Boston 
Options Exchange Group, LLC, the operator of BSE's options trading 
facility, the Boston Options Exchange (``BOX'').
    \6\ See Securities Exchange Act Release No. 58179 (July 17, 
2008) (SR-Phlx-2008-31) (order approving proposed changes relating 
to the acquisition of Phlx by NASDAQ OMX) (``Phlx Order'') at 
sections III.B and III.C.1.
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    Following the Acquisitions, Nasdaq would maintain its current 
registration as a national securities exchange, and would maintain 
rules, membership rosters, and listings that would be separate and 
distinct from the rules, membership rosters, and listings of BSE and 
Phlx.\7\ As a result of the Acquisitions, NASDAQ OMX also would acquire 
BSE's wholly-owned subsidiary, the Boston Stock Exchange Clearing 
Corporation (``BSECC''), and Phlx's wholly-owned subsidiary, the Stock 
Clearing Corporation of Philadelphia (``SCCP''), both registered 
clearing agencies.\8\ Following the closing of the Acquisitions, NASDAQ 
OMX would be the sole owner of five self-regulatory organizations 
(``SROs''): Nasdaq, BSE, BSECC, Phlx, and SCCP (collectively, ``SRO 
Subsidiaries'').
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    \7\ See NASDAQ OMX By-Law Proposal Notice, supra note 3, at 
26183.
    \8\ See NASDAQ OMX By-Laws Proposal Notice, supra note 3, at 
26182-26183. After the Acquisitions, Phlx would continue to operate 
SCCP and BSE would continue to operate BSECC. See Phlx Order, supra 
note 6, and Securities Exchange Act Release No. 57757 (May 1, 2008), 
73 FR 26159 (May 8, 2008) (SR-BSE-2008-23) (notice proposing, among 
other things, changes to BSE's governing documents and rules in 
connection with NASDAQ OMX's acquisition of BSE).
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    Although NASDAQ OMX is not itself an SRO, its activities with 
respect to the operations of its SRO Subsidiaries must be consistent 
with, and must not interfere with, the self-regulatory obligations of 
the SRO Subsidiaries. Further, certain provisions of NASDAQ OMX's 
Certificate of Incorporation and By-Laws are rules of an exchange if 
they are stated policies, practices, or interpretations, as defined in 
Rule 19b-4 under the Act, of the self-regulatory organization, and must 
be filed with the Commission pursuant to Section 19(b) of the Act and 
Rule 19b-4 thereunder.\9\ Accordingly, Nasdaq has filed with the 
Commission proposed changes to the NASDAQ OMX By-Laws.
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    \9\ 15 U.S.C. 78s(b) and 17 CFR 240.19b-4, respectively.
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    The changes to NASDAQ OMX By-Laws filed by Nasdaq would expand the 
application of certain provisions of NASDAQ OMX's Restated Certificate 
of Incorporation and NASDAQ OMX's By-Laws to include each of NASDAQ 
OMX's SRO Subsidiaries. These provisions of NASDAQ OMX's governing 
documents currently apply only to Nasdaq and are designed to maintain 
the independence of each SRO Subsidiary's self-regulatory function; 
enable each SRO Subsidiary to operate in a manner that complies with 
the federal securities laws; and facilitate the ability of each SRO 
Subsidiary and the Commission to fulfill their regulatory and oversight 
obligations under the Act.
    After careful review and for the reasons discussed more fully 
below, the Commission finds that the NASDAQ OMX By-Law Proposal is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\10\ Specifically, the Commission finds that the proposed rule 
change is consistent with Section 6(b)(1) of the Act,\11\ which 
requires, among other things, that a national securities exchange be so 
organized and have the capacity to carry out the purposes of the Act, 
and to comply 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.
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    \10\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \11\ 15 U.S.C. 78f(b)(1).
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A. Self-Regulatory Function of the SRO Subsidiaries; Relationship 
Between NASDAQ OMX and the SRO Subsidiaries; Jurisdiction Over NASDAQ 
OMX

    Although NASDAQ OMX does not itself carry out regulatory functions 
for Nasdaq and will not carry out regulatory functions for its other 
SRO Subsidiaries, its activities with respect to the operation of its 
SRO Subsidiaries, including Nasdaq, must be consistent and not 
interfere with their respective self-regulatory obligations. The NASDAQ 
OMX Certificate and the NASDAQ OMX By-Laws include certain provisions, 
approved by the Commission in the context of Nasdaq's registration as a 
national securities exchange,\12\ that are designed to maintain the 
independence of Nasdaq's self-regulatory function from NASDAQ OMX, 
enable Nasdaq to operate in a manner that complies with the federal 
securities laws, including the objectives of Sections 6(b) and 19(g) of 
the Act,\13\ and facilitate the ability of Nasdaq and the Commission to 
fulfill their regulatory and oversight obligations under the Act.\14\ 
Nasdaq's proposed rule change would make these provisions applicable to 
all of NASDAQ OMX's SRO Subsidiaries.\15\
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    \12\ See Securities Exchange Act Release No. 53128 (January 13, 
2006), 71 FR 3550 (January 23, 2006) (``Nasdaq Exchange Registration 
Approval Order'') at notes 27-34 and accompanying text.
    \13\ 15 U.S.C. 78f(b) and 15 U.S.C. 78s(g).
    \14\ See Sections 11.3 and 12.1-12.5, NASDAQ OMX By-Laws.
    \15\ Nasdaq proposes to add a definition of ``Self-Regulatory 
Subsidiary'' that includes each SRO Subsidiary. Self-Regulatory 
Subsidiary would mean each of (i) Nasdaq; (ii) upon the closing of 
their acquisition by NASDAQ OMX, BSE and BSECC; and (iii) upon the 
closing of their acquisition by NASDAQ OMX, Phlx and SCCP. See 
proposed Article I(o), NASDAQ OMX By-Laws. The proposed rule change 
would expand the applicability of the Section 11.3 and each section 
of Article XII of the NASDAQ OMX By-Laws, currently applicable only 
to Nasdaq, to also include BSE, BSECC, Phlx and SCCP.
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    In particular, as amended, the By-Laws of NASDAQ OMX specify that 
NASDAQ OMX and its officers, directors, employees, and agents 
irrevocably submit to the jurisdiction of the United States federal 
courts, the Commission, and each self-regulatory subsidiary of NASDAQ 
OMX for the purposes of any suit, action or proceeding pursuant to the 
United States federal securities laws, and the rules and regulations 
thereunder, arising out of, or relating to, the activities of any self-
regulatory subsidiary.\16\ Further, NASDAQ OMX agreed to provide the 
Commission with access to its books and records.\17\ NASDAQ OMX also 
agreed to keep confidential non-public information relating to the 
self-regulatory function \18\ of each SRO

[[Page 42852]]

Subsidiary, including Nasdaq, and not to use such information for any 
non-regulatory purpose. In addition, the board of directors of NASDAQ 
OMX (``NASDAQ OMX Board''), as well as NASDAQ OMX's officers, 
employees, and agents, are required to give due regard to the 
preservation of the independence of each SRO Subsidiary's, including 
Nasdaq's, self-regulatory function.\19\ Similarly, the NASDAQ OMX 
Board, when evaluating any issue, would be required to take into 
account the potential impact on the integrity, continuity, and 
stability of the SRO Subsidiaries.\20\ Finally, the NASDAQ OMX By-Laws 
require that any changes to the NASDAQ OMX Certificate and By-Laws be 
submitted to the Board of Directors of each of its SRO Subsidiaries, 
including Nasdaq, and, if such amendment is required to be filed with 
the Commission pursuant to Section 19(b) of the Act, such change shall 
not be effective until filed with, or filed with and approved by, the 
Commission.\21\
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    \16\ See proposed Section 12.3, NASDAQ OMX By-Laws.
    \17\ See proposed Section 12.1(c), NASDAQ OMX By-Laws. To the 
extent that they relate to the activities of Nasdaq, all books, 
records, premises, officers, directors, and employees of NASDAQ OMX 
would be deemed to be those of the Nasdaq. See id.
    \18\ This requirement to keep confidential non-public 
information relating to the self-regulatory function shall not limit 
the Commission's ability to access and examine such information or 
limit the ability of directors, officers, or employees of the NASDAQ 
OMX from disclosing such information to the Commission. See proposed 
Section 12.1(b), NASDAQ OMX By-Laws. Other holding companies with 
SRO subsidiaries have undertaken similar commitments. See, e.g., 
Securities Exchange Act Release No. 56955 (December 13, 2007), 72 FR 
71979, 71983 (December 19, 2007) (SR-ISE-2007-101) (order approving 
the acquisition of International Securities Exchange, LLC's parent, 
International Securities Exchange Holdings, Inc., by Eurex Frankfurt 
AG).
    \19\ See Section 12.1(a), NASDAQ OMX By-Laws. Also, NASDAQ OMX's 
officers, directors, agents and employees agree to cooperate with 
the Commission and each SRO Subsidiary in respect of their 
respective regulatory responsibilities. See proposed Section 12.2, 
NASDAQ OMX By-Laws.
    Further, pursuant to proposed Section 12.4 of the NASDAQ OMX By-
Laws, NASDAQ OMX agreed to take such action as is necessary to 
insure that its officers, directors, employees and agents consent in 
writing to the applicability of Sections 12.1, 12.2 and 12.3 of the 
NASDAQ OMX By-Laws with respect to activities related to each SRO 
Subsidiary.
    \20\ See proposed Section 12.7, NASDAQ OMX By-Laws.
    \21\ See proposed Sections 11.3 and 12.6, NASDAQ OMX By-Laws.
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    The Commission believes that the NASDAQ OMX By-Laws, as amended to 
accommodate the Acquisitions, are designed to continue to facilitate 
Nasdaq's ability to fulfill its self-regulatory obligations and are, 
therefore, consistent with the Act. In particular, the Commission 
believes these changes are consistent with Section 6(b)(1) of the 
Act,\22\ which requires, among other things, that a national securities 
exchange be so organized and have the capacity to carry out the 
purposes of the Act, and to comply 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.
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    \22\ 15 U.S.C. 78f(b)(1).
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    The Commission also believes that under Section 20(a) of the Act 
\23\ any person with a controlling interest in NASDAQ OMX would be 
jointly and severally liable with and to the same extent that NASDAQ 
OMX is liable under any provision of the Act, unless the controlling 
person acted in good faith and did not directly or indirectly induce 
the act or acts constituting the violation or cause of action. In 
addition, Section 20(e) of the Act \24\ creates aiding and abetting 
liability for any person who knowingly provides substantial assistance 
to another person in violation of any provision of the Act or rule 
thereunder. Further, Section 21C of the Act \25\ authorizes the 
Commission to enter a cease-and-desist order against any person who has 
been ``a cause of'' a violation of any provision of the Act through an 
act or omission that the person knew or should have known would 
contribute to the violation.
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    \23\ 15 U.S.C. 78t(a).
    \24\ 15 U.S.C. 78t(e).
    \25\ 15 U.S.C. 78u-3.
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B. Exemptions From Voting Limitations

    The NASDAQ OMX Certificate imposes limits on direct and indirect 
changes in control, which are designed to prevent any shareholder from 
exercising undue control over the operation of Nasdaq and to ensure 
that Nasdaq and the Commission are able to carry out their regulatory 
obligations under the Act. \26\ Specifically, no person who 
beneficially owns shares of common stock, preferred stock, or notes of 
NASDAQ OMX in excess of 5% of the securities generally entitled to vote 
may vote the shares in excess of 5%.\27\ No changes to these 
limitations are proposed.
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    \26\ See Nasdaq Exchange Registration Approval Order, supra note 
12, at 3552.
    \27\ See Article Fourth.C, NASDAQ OMX Certificate.
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    The NASDAQ OMX Board may approve exemptions from the 5% voting 
limitations for any person that is not a broker-dealer, an affiliate of 
a broker-dealer, or a person subject to a statutory disqualification 
under Section 3(a)(39) of the Act,\28\ so long as the NASDAQ OMX Board 
also determines that granting such exemption would be consistent with 
the self-regulatory obligations of Nasdaq.\29\ Further, any such 
exemption from the 5% voting limitations would not be effective until 
approved by the Commission pursuant to Section 19 of the Act.\30\ 
Nasdaq's proposed rule change reflects an amendment to the NASDAQ OMX 
By-Laws to require the NASDAQ OMX Board, prior to approving any 
exemption from the 5% voting limitations, to determine that granting 
such exemption would be consistent with the self-regulatory obligations 
of each SRO Subsidiary, including Nasdaq.\31\ Therefore, there is no 
change in the application of this provision to Nasdaq.
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    \28\ 15 U.S.C. 78c(a)(39). See Article Fourth.C.6, NASDAQ OMX 
Certificate.
    \29\ Specifically, the NASDAQ OMX Board must determine that 
granting such exemption would (1) not reasonably be expected to 
diminish the quality of, or public confidence in, NASDAQ OMX or the 
other operations of NASDAQ OMX, on the ability to prevent fraudulent 
and manipulative acts and practices and on investors and the public, 
and (2) promote just and equitable principles of trade, foster 
cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to and 
facilitating transactions in securities or assist in the removal of 
impediments to or perfection of the mechanisms for a free and open 
market and a national market system. See Article Fourth.C.6, NASDAQ 
OMX Certificate.
    \30\ See Section 12.5, NASDAQ OMX By-Laws.
    \31\ See proposed Section 12.5, NASDAQ OMX By-Laws. These 
provisions would apply for so long as NASDAQ OMX controls, directly 
or indirectly, any SRO Subsidiary. Id. See also supra note 20 and 
accompanying text.
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    The Commission finds that the foregoing change to the NASDAQ OMX 
By-Laws to reflect NASDAQ OMX's ownership of multiple SRO Subsidiaries 
is consistent with the Act.

III. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\32\ that the NASDAQ OMX By-Law Proposal (SR-NASDAQ-2008-035), as 
modified by Amendment No. 1 thereto, be, and hereby is, approved.\33\
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    \32\ 15 U.S.C. 78s(b)(2).
    \33\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.
Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-16828 Filed 7-22-08; 8:45 am]

BILLING CODE 8010-01-P