Document ID: SEC-2009-1363-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; NASDAQ OMX PHLX, Inc.; Order Approving Proposed Rule Change, as Modified by Amendment Nos. 1 and 2 Thereto, Relating to the Exchange's By-Laws, Regulatory Oversight Committee and Referee Program
Posted Date: 2009-09-25T04:00Z

[Federal Register: September 25, 2009 (Volume 74, Number 185)]
[Notices]               
[Page 49060-49061]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr25se09-152]                         

[[Page 49060]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60687; File No. SR-Phlx-2009-59]

 
Self-Regulatory Organizations; NASDAQ OMX PHLX, Inc.; Order 
Approving Proposed Rule Change, as Modified by Amendment Nos. 1 and 2 
Thereto, Relating to the Exchange's By-Laws, Regulatory Oversight 
Committee and Referee Program

September 18, 2009.
    On July 27, 2009, NASDAQ OMX PHLX, Inc. (``Phlx'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission'') 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to 
modify its governance structure. On July 30, 2009, the Exchange filed 
Amendment No. 1 to the proposed rule change. The proposed rule change 
was published for comment in the Federal Register on August 11, 
2009.\3\ On September 9, 2009, the Exchange filed Amendment No. 2 to 
the proposed rule change.\4\ The Commission received no comments 
regarding the proposal. This order approves the proposed rule change, 
as modified by Amendment Nos. 1 and 2.
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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. 60431 (August 4, 
2009), 74 FR 40265 (``Notice'').
    \4\ Amendment No. 2 is a technical amendment that reflects 
approval of portions of the proposed rule change by the Exchange's 
Board of Governors (``Board'') and therefore is not required to be 
published for comment.
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I. Description of the Proposed Rule Change

    The Exchange seeks to conform several aspects of its governance 
structure more closely to the governance structure of certain of its 
affiliates, The NASDAQ Stock Market LLC (the ``NASDAQ Exchange'') and 
NASDAQ OMX BX, Inc. (``BX''). Specifically, Phlx proposes to amend its 
By-Laws to allow for the elimination of its audit and management 
compensation committees. Phlx's audit committee is primarily charged 
with: (1) Overseeing Phlx's financial reporting process; (2) overseeing 
the systems of internal controls established by management and the 
Exchange's Board, as well as the legal and compliance process; (3) 
selection and evaluation of independent auditors; and (4) direction and 
oversight of the internal audit function. Currently, the NASDAQ OMX 
audit committee also performs these functions.\5\ Phlx proposes that 
the responsibilities of its audit committee be performed by the NASDAQ 
OMX audit committee \6\ and a new regulatory oversight committee to be 
established by the Exchange.
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    \5\ The Exchange states that the NASDAQ OMX audit committee has 
broad authority to review the financial information that will be 
provided to shareholders and others, systems of internal controls, 
and audit, financial reporting and legal and compliance processes 
and, because NASDAQ OMX's financial statements are prepared on a 
consolidated basis that includes the financial results of NASDAQ 
OMX's subsidiaries, including Phlx, the NASDAQ OMX audit committee's 
purview necessarily includes these subsidiaries. In addition, the 
Exchange states that the NASDAQ OMX audit committee currently is 
charged with providing oversight of financial reporting and 
independent auditor selection for NASDAQ OMX and all of its 
subsidiaries, including Phlx, and the NASDAQ OMX audit committee has 
general responsibility for oversight of internal controls and 
direction and oversight of the internal audit function for NASDAQ 
OMX and all of its subsidiaries. See Notice, 74 FR at 40266-67.
    \6\ According to the Exchange, the NASDAQ OMX audit committee is 
composed of four or five directors, all of whom must be independent 
under the standards established by Section 10A(m) of the Act and the 
listing rules of The NASDAQ Exchange. See NASDAQ OMX Bylaws, Section 
4.13(i); NASDAQ Exchange Rules, IM-5605-3. All committee members 
must be able to read and understand financial statements, and at 
least one member must have past employment experience in finance or 
accounting, requisite professional certification in accounting, or 
any other comparable experience or background that results in the 
individual's financial sophistication. See NASDAQ Exchange Rules, 
IM-5603-3.
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    Phlx also proposes to eliminate its compensation committee, and to 
prescribe that its duties be performed by the NASDAQ OMX compensation 
committee, or the full Phlx board when required. The NASDAQ OMX 
compensation committee considers and recommends compensation policies, 
programs, and practices for employees of NASDAQ OMX. According to Phlx, 
some employees performing work for Phlx are also employees of NASDAQ 
OMX, and certain senior officers of Phlx are also officers of NASDAQ 
OMX and other NASDAQ OMX subsidiaries because their responsibilities 
relate to multiple entities within the NASDAQ OMX corporate structure. 
As a result, NASDAQ OMX establishes compensation and compensation 
policy for these employees. To the extent that policies, programs, and 
practices must be established for any Phlx officers or employees who 
are not also NASDAQ OMX officers or employees, Phlx states that the 
Phlx Board will perform such actions without the use of a compensation 
committee, subject to recusal by the chief executive officer and the 
Stockholder Governor.
    The Exchange also proposes to create a regulatory oversight 
committee (``ROC'') composed of three members, each of whom would be an 
Independent Governor.\7\ The Exchange's ROC would carry out regulatory 
oversight tasks formerly performed by the audit committee. More 
specifically, the ROC would oversee the adequacy and effectiveness of 
Phlx's regulatory and self-regulatory organization responsibilities; 
assess Phlx's regulatory performance; and assist the Board and its 
standing committees in reviewing the regulatory plan and the overall 
effectiveness of Phlx's regulatory functions. Its duties would include 
reviewing Phlx's regulatory budget and inquiring into the adequacy of 
resources available in the budget for regulatory activities; meeting 
regularly with Phlx's chief regulatory officer in executive session; 
and being informed about the compensation and promotion or termination 
of the chief regulatory officer and the corresponding justifications 
for such actions.
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    \7\ See Phlx Bylaws, Article I(p) for the definition of 
``Independent Governor.''
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    In addition, Phlx stated that, like the NASDAQ Exchange's 
regulatory oversight committee, the proposed ROC will have broad 
authority to oversee the adequacy and effectiveness of Phlx's 
regulatory and self-regulatory organization responsibilities, and will 
therefore be able to maintain oversight over controls in tandem with 
the NASDAQ OMX audit committee's responsibilities.\8\ In this regard, 
Phlx noted that it is already the practice of NASDAQ OMX's Internal 
Audit Department, which performs internal audit functions for all 
NASDAQ OMX subsidiaries, to report to the Phlx Board on all internal 
audit matters relating to Phlx, and that this practice would be 
formally reflected in the Department's written procedures.\9\ Phlx also 
represented that, to ensure that the Phlx board retains authority to 
direct the Department's activities with respect to Phlx, the 
Department's written procedures will be amended to stipulate that the 
ROC may, at any time, direct the Department to conduct an audit of a 
matter of concern to it and report the results of the audit both to the 
ROC and the NASDAQ OMX audit committee.\10\
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    \8\ See Notice, 74 FR at 40266.
    \9\ See id.
    \10\ See id.
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    Phlx also proposes to codify in its By-Laws a description of the 
position of chief regulatory officer. Article V, Section 5-6 of the By-
Laws would provide that the chief regulatory officer will have general 
supervision of Phlx's regulatory operations, including the 
responsibility for overseeing its surveillance, examination, and 
enforcement functions and for

[[Page 49061]]

administering any regulatory services agreements with another self-
regulatory organization to which the Exchange is a party. The revised 
By-Laws would require the chief regulatory officer to meet with the 
regulatory oversight committee in executive session at regularly 
scheduled meetings, and at any time upon request of the chief 
regulatory officer or any member of the committee.
    Finally, Phlx proposes to replace its Referee with an Options Trade 
Review Committee, and, as more fully described in the Notice, make 
conforming changes to the Exchange's rules and one of its Options Floor 
Procedure Advices. Currently, the Exchange's By-Laws and rules provide 
that the Referee is an Exchange employee (or independent contractor), 
supervised by the audit committee, who reviews Options Exchange 
Official rulings concerning the nullification and/or adjustment of 
transactions. In addition, the Referee can act in the capacity of an 
Options Exchange Official respecting initial rulings concerning 
requests for relief from the requirements of certain Exchange rules, 
Equity Floor Procedure Advices and Option Floor Procedure Advices. The 
proposed new Options Trade Review Committee would review Options 
Exchange Official rulings, but would not act in the capacity of an 
Options Exchange Official, even though the Referee was able to do so. 
In light of the time sensitivity of rendering trading decisions, the 
Exchange would allow the Options Trade Review Committee to act through 
a panel with a minimum of three committee members, of which no more 
than 50% may be engaged in market making activity or employed by an 
Exchange Member Organization whose revenues from market making activity 
exceed 10% of its total revenues. When needed, a panel would be 
selected by Exchange regulatory staff from the Committee members on a 
rotating basis, taking into consideration availability and prompt 
response as well as frequency of service, and the importance of 
assembling a panel quickly. Appeals of Options Exchange Official 
decisions would be presented to the panel on an anonymous basis to 
reduce the risk of conflict or bias. Committee decisions, like Referee 
decisions, would not be appealable.
    The Options Trade Review Committee would be appointed by the 
Exchange's Board pursuant to new By-Law Article X, Section 10-10 as a 
standing committee of the Board and would include a number of Member 
Representative members equal to at least 20% of the total number of 
members of the Committee. No more than 50% of committee members can be 
engaged in market making activity or employed by an Exchange Member 
Organization whose revenues from market making activity exceed 10% of 
its total revenues.

II. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\11\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(1) of the Act,\12\ which 
requires a national securities exchange to be so organized and have the 
capacity to carry out the purposes of the Act and to comply, and to 
enforce compliance by its members and persons associated with its 
members, with the provisions of the Act. The Commission also finds that 
the proposed rule change is consistent with Section 6(b)(5) of the 
Act,\13\ in that it is designed, among other things, to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to remove impediments to and perfect the 
mechanism of a free and open market and a national market system, and, 
in general, to protect investors and the public interest.
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    \11\ In approving this proposed rule change, the Commission 
notes that it has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \12\ 15 U.S.C. 78(b)(1).
    \13\ 15 U.S.C. 78f(b)(5).
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    The Commission finds that the proposed elimination of the Phlx's 
audit and management compensation committees is consistent with the 
Act. The Commission previously approved a structure in which certain 
committees of the board of directors of NYSE Euronext, including the 
audit and compensation committees, were authorized to perform functions 
for various subsidiaries, including the New York Stock Exchange, LLC 
(``NYSE'').\14\ More recently, the Commission approved proposals by the 
NASDAQ Exchange and BX to eliminate their respective audit and 
compensation committees.\15\
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    \14\ Securities Exchange Act Release No. 55293 (February 14, 
2007), 72 FR 8033 (February 22, 2007) (SR-NYSE-2006-120).
    \15\ See Securities Exchange Act Release Nos. 60276 (July 9, 
2009), 74 FR 34840 (July 17, 2009) (SR-NASDAQ-2009-042) and 60247 
(July 17, 2009), 74 FR 33495 (July 13, 2009) (SR-BX-2009-021).
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    The Commission further finds that the elimination of the Referee 
position and its replacement with the Options Trade Review Committee is 
consistent with the Act. The compositional requirements for the 
Committee and committee panels, the rotating service of panel members, 
and the anonymous presentation of appeals of Options Exchange Official 
decisions to a panel of the Committee are designed to assure impartial 
review of those decisions.
    Finally, the Commission finds that the proposals relating to 
codifying the position of chief regulatory officer and creating a 
regulatory oversight committee to oversee all regulatory initiatives 
are designed to allow the Exchange to carry out its regulatory 
obligations and are consistent with the Act.

III. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\16\ that the proposed rule change (SR-Phlx-2009-59), as modified 
by Amendment Nos. 1 and 2, be, and it hereby is, approved.
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    \16\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-23096 Filed 9-24-09; 8:45 am]

BILLING CODE 8010-01-P