Document ID: SEC-2009-0992-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order Approving Proposed Rule Change To Amend Its Limited Liability Agreement and By-Laws
Posted Date: 2009-07-17T04:00Z

[Federal Register: July 17, 2009 (Volume 74, Number 136)]
[Notices]               
[Page 34840-34842]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr17jy09-128]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60276; File No. SR-NASDAQ-2009-042]

 
Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order 
Approving Proposed Rule Change To Amend Its Limited Liability Agreement 
and By-Laws

July 9, 2009.
    On April 29, 2009, The NASDAQ Stock Market LLC (``NASDAQ Exchange'' 
or ``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to amend its Limited Liability Agreement 
(``Agreement'') and By-Laws.\3\ The proposed rule change was published 
for comment in the Federal Register on May 20, 2009.\4\ The Commission 
received no comments regarding the proposal. This order approves the 
proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The Agreement includes and incorporates an exhibit 
designated as the By-Laws of the NASDAQ Stock Market LLC. 
Accordingly, the By-Laws are part of the Agreement. See Securities 
Exchange Act Release No. 59907 (May 12, 2009), 74 FR 23761 
(``Notice''), 23761 n.3.
    \4\ See Notice, supra note 3.
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I. Description of the Proposed Rule Change

    Currently, the NASDAQ Exchange board and the board of its parent 
company, NASDAQ OMX Group, Inc. (``NASDAQ OMX''), maintain their own 
audit committee and management compensation committees. As more fully 
discussed in the Notice, the Exchange states that it has found the work 
of these committees to overlap substantially.\5\ As a result, the 
Exchange proposes to revise its Agreement to allow for the elimination 
of its audit and management compensation committees.
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    \5\ See Notice, 74 FR at 23761.
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    The Exchange also proposes to amend the Agreement to allow for the 
elimination of its arbitration and mediation committee, provided that 
the NASDAQ Exchange's arbitration and mediation program is operated by 
the Financial Industry Regulatory Authority (``FINRA''), which the 
NASDAQ Exchange states is currently the case.
    In addition, as discussed in the Notice, the Exchange proposes 
changes to its rules governing the selection of Member Representative 
Directors, as well as to update certain aspects of its Agreement.\6\
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    \6\ Specifically, the Exchange would: reflect the name change of 
The Nasdaq Stock Market, Inc. to The NASDAQ OMX Group, Inc.; reflect 
the name change of National Association of Securities Dealers, Inc. 
to FINRA; correct typographical errors in the definition of 
``Industry member'' in Article I of the By-Laws and in Section 6 of 
the Agreement; and redesignate the Agreement as the ``Second Amended 
Limited Liability Company Agreement of The NASDAQ Stock Market 
LLC.''
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II. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities exchange.\7\ 
In particular, the Commission finds that the proposed rule change is 
consistent with Section 6(b)(1) of the Act,\8\ which requires a 
national securities exchange to be so organized and have the capacity 
to carry out the purposes of the Act and to comply, and to enforce 
compliance by its members and persons associated with its members, with 
the provisions of the Act. The Commission also finds that the proposed 
rule change is consistent with Section 6(b)(3) of the Act,\9\ which 
requires that the rules of a national securities exchange assure a fair 
representation of its members in the selection of its directors and 
administration of its affairs and provide that one or more directors 
shall be representative of issuers and investors and not be associated 
with a member of the exchange, broker, or dealer. The Commission 
further finds that the proposed rule change is consistent with Section 
6(b)(5) of the Act,\10\ in that it is designed, among other things, to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, to remove impediments to and perfect 
the mechanism of a free and open market and a national market system, 
and, in general, to protect investors and the public interest. The 
Commission previously approved a structure in which certain committees 
of the board of directors of NYSE Euronext, including the audit and 
compensation committees, were authorized to perform functions for 
various subsidiaries, including the New York Stock Exchange, LLC 
(``NYSE'').\11\
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    \7\ In approving this proposed rule change, the Commission notes 
that it has considered the proposed rule's impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f).
    \8\ 15 U.S.C. 78f(b)(1).
    \9\ 15 U.S.C. 78f(b)(3).
    \10\ 15 U.S.C. 78f(b)(5).
    \11\ Securities Exchange Act Release No. 55293 (February 14, 
2007), 72 FR 8033 (February 22, 2007) (SR-NYSE-2006-120).
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A. Elimination of the Exchange's Audit and Management Compensation 
Committees

    Currently, the NASDAQ Exchange audit committee is primarily charged 
with: (1) Oversight of the NASDAQ Exchange's financial reporting; (2) 
oversight of the systems of internal controls established by management 
and the NASDAQ Exchange board, as well as the legal and compliance 
process; (3) selection and evaluation of independent auditors; and (4) 
direction and oversight of the internal audit function. The Exchange 
states that the responsibilities of the NASDAQ Exchange's audit 
committee are fully duplicated \12\ by the

[[Page 34841]]

responsibilities of the NASDAQ OMX audit committee.\13\ In addition, 
the NASDAQ Exchange states that its regulatory oversight committee has 
broad authority to oversee the adequacy and effectiveness of its 
regulatory and self-regulatory organization responsibilities, and 
therefore is able to maintain oversight over internal controls in 
tandem with the NASDAQ OMX audit committee. Further, the NASDAQ 
Exchange states that the practice of NASDAQ OMX's Internal Audit 
Department (``Department''),\14\ which performs internal audit 
functions for all NASDAQ OMX subsidiaries, is to report to the NASDAQ 
Exchange regulatory oversight committee on all internal audit matters 
relating to the NASDAQ Exchange will be formally reflected in the 
Department's written procedures. The Exchange also represents that, to 
ensure that its board retains authority to direct the Department's 
activities with respect to the NASDAQ Exchange, the Department's 
written procedures will be amended to stipulate that the NASDAQ 
Exchange regulatory oversight committee may, at any time, direct the 
Department to conduct an audit of a matter of concern to it and report 
the results of the audit both to the NASDAQ Exchange regulatory 
oversight committee and the NASDAQ OMX audit committee.\15\
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    \12\ Specifically the NASDAQ Exchange states the NASDAQ OMX 
audit committee, described infra at n.13, has broad authority to 
review the financial information that will be provided to 
shareholders and others, systems of internal controls, and audit, 
financial reporting and legal and compliance processes and, because 
NASDAQ OMX's financial statements are prepared on a consolidated 
basis that includes the financial results of NASDAQ OMX's 
subsidiaries, including the Exchange, the NASDAQ OMX audit 
committee's purview necessarily includes these subsidiaries. In 
addition, the NASDAQ OMX audit committee currently is charged with 
providing oversight over financial reporting and independent auditor 
selection for NASDAQ OMX and all of its subsidiaries, including the 
Exchange; and the NASDAQ OMX audit committee has general 
responsibility for oversight over internal controls and direction 
and oversight over the internal audit function for NASDAQ OMX and 
all of its subsidiaries. See Notice, 74 FR at 23761, 23762.
    \13\ 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. 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.
    \14\ See Notice, 74 FR at 23762.
    \15\ See id.
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    The Exchange also proposes to allow the elimination of its 
compensation committee, and to prescribe that the functions of that 
committee be performed by the NASDAQ OMX compensation committee or by 
the full NASDAQ Exchange board, when required. The NASDAQ OMX By-Laws 
provide that its compensation committee considers and recommends 
compensation policies, programs, and practices for employees of NASDAQ 
OMX. Many employees performing work for the NASDAQ Exchange are also 
employees of NASDAQ OMX, and certain senior officers of the NASDAQ 
Exchange are also officers of NASDAQ OMX and other NASDAQ OMX 
subsidiaries because their responsibilities relate to multiple entities 
within the NASDAQ OMX corporate structure.\16\ As a result, NASDAQ OMX 
establishes compensation and compensation policy for these employees.
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    \16\ Id.
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    To the extent that policies, programs, and practices must be 
established for any NASDAQ Exchange officers or employees who are not 
also NASDAQ OMX officers or employees, the Exchange states that its 
board will perform such actions without the use of a compensation 
committee, subject to recusal by Staff Directors.\17\
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    \17\ See NASDAQ Exchange By-Laws, Article I(j). Staff Directors 
are directors of the Exchange that are also serving as officers. 
Because the NASDAQ Exchange board would not be responsible for 
setting the compensation of any Staff Directors who are also 
officers of NASDAQ OMX, these directors would be permitted to 
participate in discussions concerning compensation of Exchange 
employees, but the Exchange states that they must recuse themselves 
from a vote on the subject to allow the determination to be made by 
directors that are not officers or employees of the Exchange. The 
NASDAQ Exchange also states that, if a Staff Director is not also an 
employee of NASDAQ OMX, that Staff Director also must absent himself 
or herself from any deliberations regarding his or her compensation.
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    The Commission notes that the proposed elimination of the NASDAQ 
Exchange audit and management compensation committees is comparable to 
a structure for the NYSE that the Commission previously considered and 
approved.\18\ The Commission finds that the proposed elimination of the 
NASDAQ Exchange's audit and management compensation committees is 
consistent with the Act.
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    \18\ See Securities Exchange Act Release No. 55293 (February 14, 
2007), 72 FR 8033 (February 22, 2007) (SR-NYSE-2006-120).
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B. Elimination of the NASDAQ Exchange's Arbitration and Mediation 
Committee.

    As provided in the Agreement, the arbitration and mediation 
committee is to advise the Board on the development and maintenance of 
an equitable and efficient system of dispute resolution that will 
equally serve the needs of public investors and NASDAQ Exchange 
members, to monitor rules and procedures governing the conduct of 
dispute resolution, and to have such other powers and authority as are 
necessary to effectuate the purposes of the NASDAQ Exchange rules. The 
Exchange states that, at this time, there is no meaningful role for 
this committee to play because the NASDAQ Exchange's arbitration and 
mediation program presently is operated by FINRA. All information 
needed by the NASDAQ Exchange board or staff to evaluate the 
effectiveness of FINRA's administration of the program is obtained 
through the Exchange's oversight of FINRA's performance through its 
authority under its regulatory services agreement to obtain reports 
from FINRA and to conduct audits.
    The Commission notes that neither the Exchange nor its predecessor 
(The Nasdaq Stock Market, Inc.) has ever operated a dispute resolution 
program that was not administered by FINRA or its predecessor (the 
National Association of Securities Dealers, Inc.).\19\ Therefore, no 
ongoing dispute will be affected by the elimination of this committee. 
In the addition, the Agreement, as revised, would continue to provide 
for the establishment of such a committee in the event that the NASDAQ 
Exchange in the future opts to establish an arbitration or mediation 
program that is not operated by FINRA in accordance with FINRA rules. 
The Commission therefore finds that the proposed rule change is 
consistent with the Act, as the Exchange will continue to be organized 
and have the capacity to carry out the purposes of the Act and to 
comply with and enforce compliance by its members and persons 
associated with its members with the provisions of the Act, the rules 
and regulations thereunder, and the rules of the Exchange.
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    \19\ See Notice, 72 FR at 23762, n.16.
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C. Selection of Member Representative Directors

    Under the Agreement, 20% of the Exchange's directors are selected 
through a process in which the Exchange's member nominating committee 
nominates a slate of candidates but members also have the opportunity 
to nominate alternative candidates. If no alternative candidates are 
nominated by members, the candidates recommended by the member 
nominating committee are elected. Alternatively, if alternative 
candidates are nominated, there is a ``Contested Election'' in which 
members cast ballots in order to determine who fills the vacancies. The 
Exchange proposes to prohibit a member, either alone or together with 
its affiliates, from

[[Page 34842]]

casting votes representing more than 20% of the votes cast for a 
candidate, and to provide that any votes cast by the member, either 
alone or together with its affiliates in excess of the 20%, limit shall 
be disregarded. The Exchange also proposes to amend its By-Laws to 
provide that an Election Date is selected by the Exchange's board on an 
annual basis, and that members only cast votes on such date if there is 
a Contested Election. The Commission finds that these changes are 
consistent with the Act, including Section 6(b)(3) of the Act,\20\ 
which requires that a national securities exchange assure the fair 
representation of its members in the selection of its directors and 
administration of its affairs. The Commission recently approved similar 
changes proposed by NASDAQ OMX BX, Inc.\21\
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    \20\ 15 U.S.C. 78f(b)(3).
    \21\ See Securities Exchange Act Release Nos. 58324 (August 7, 
2008), 73 FR 46936, 46940-41 (August 12, 2008) (SR-BSE-2008-02, -23, 
-25, SR-BSECC-2001-01) and 58864 (October 27, 2008), 73 FR65430 
(November 3, 2009) (SR-BSE-2008-45).
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III. Conclusion
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\22\ that the proposed rule change (SR-NASDAQ-2009-042) be, and it 
hereby is, approved.
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    \22\ 15 U.S.C. 78s(b)(2).
    \23\ 17 CFR 200.30-3(a)(12).

For the Commission, by the Division of Trading and Markets, pursuant 
to delegated authority.\23\
Elizabeth M. Murphy,
Secretary.
[FR Doc. E9-17005 Filed 7-16-09; 8:45 am]

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