Document ID: SEC-2007-1397-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: NASDAQ Stock Market LLC
Posted Date: 2007-10-05T04:00Z

[Federal Register: October 5, 2007 (Volume 72, Number 193)]
[Notices]               
[Page 57083-57085]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr05oc07-89]                         

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56581; File No. SR-NASDAQ-2007-068]

 
Self-Regulatory Organizations; The NASDAQ Stock Market, LLC; 
Notice of Filing of Proposed Rule Change, as Modified by Amendment No. 
1 Thereto, To Amend the Limited Liability Company Agreement of The 
NASDAQ Stock Market, LLC

September 28, 2007.
    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 July 20, 2007, The NASDAQ Stock Market, LLC (``Nasdaq'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared substantially by Nasdaq. 
On September 26, 2007, Nasdaq filed Amendment No. 1 to the proposed 
rule change. The Commission is publishing this notice to solicit 
comments on the proposed rule change, as amended, from interested 
persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Nasdaq proposes to amend its Limited Liability Company Agreement 
(``LLC Agreement''). Nasdaq will implement the proposed rule change 
immediately upon approval by the Commission. The text of the proposed 
rule change is available at Nasdaq's Web site http://nasdaq.complinet.com
, at Nasdaq, and at the Commission's Public 

Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, Nasdaq 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 IV below. Nasdaq 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
    Nasdaq is modifying its LLC Agreement (including its By-Laws, which 
are a part of the LLC Agreement) to adopt a range of enhancements and 
clarifications. First, Nasdaq is amending the procedures for election 
of Member Representative Directors. Section 6(b)(3) of the Act \3\ 
requires a national securities exchange to establish rules that assure 
a fair representation of its members in the selection of its directors. 
To address this requirement, the LLC Agreement provides that twenty 
percent of Nasdaq's directors are selected through direct election by 
Nasdaq's members. Under the current By-Laws, a slate of candidates is 
nominated by a Member Nominating Committee composed of registered 
representatives of Nasdaq members. In addition, there is a petition 
process through which Nasdaq members may nominate alternate candidates. 
The Nasdaq Board establishes a Record Date \4\ and an Election Date,\5\ 
and provides notice of both dates through a communication to members 
that also includes the List of Candidates \6\ developed through the 
nomination and petition process. After receiving the notice, firms that 
were Nasdaq members on the Record Date are entitled to cast ballots at 
any time prior to 5 pm on the Election Date. The candidates receiving 
the most votes are then elected to the open positions.
---------------------------------------------------------------------------

    \3\ 15 U.S.C. 78f(b)(3).
    \4\ Article I(aa) of Nasdaq's current By-Laws defines ``Record 
Date'' as a date selected by the Board for the purpose of 
determining the Nasdaq Members entitled to vote for the election of 
Member Representative Directors on an Election Date.
    \5\ Article I(j) of Nasdaq's current By-Laws defines ``Election 
Date'' as a date selected by the Board for the election of Member 
Representative Directors.
    \6\ Article I(o) of Nasdaq's current By-Laws defines ``List of 
Candidates'' as the list of candidates for Member Representative 
Director positions to be elected by Nasdaq Members on an Election 
Date.
---------------------------------------------------------------------------

    Nasdaq held its first election of Member Representative Directors 
in January 2007, and although the election concluded successfully, 
Nasdaq faced some difficulty in educating members about the purpose of 
the election and the desirability of participating. Notably, many 
members were not interested in voting and therefore Nasdaq had to 
retain the services of a proxy solicitation firm to obtain a quorum, 
and only obtained the quorum in the days immediately prior to the 
Election Date. In reviewing the experience of the first election 
process, Nasdaq has noted that the New York Stock Exchange, LLC, the 
primary U.S. exchange subsidiary of NYSE Euronext, has a similar 
nomination process for a percentage of its directors, but conducts a 
direct member election only if there is a contested election (i.e., if 
there is more than one candidate for a particular Board seat).\7\ 
Accordingly, Nasdaq proposes to adopt a comparable limit on the use of 
the direct member election.
---------------------------------------------------------------------------

    \7\ See Second Amended and Restated Operating Agreement of New 
York Stock Exchange LLC at http://www.nyse.com/pdfs/SecondAmendedandRestatedOperatingAgreementofNewYorkStockExchangeLLC.pdf
.

---------------------------------------------------------------------------

    As amended, the election process would work as follows: On an 
annual basis, the Member Nominating Committee would nominate a slate of 
candidates. Although the Member Nominating Committee would have 
authority to nominate a number of candidates in excess of the number of 
Board seats up for election, the Member Nominating Committee would 
likely nominate a number of candidates equal to the number of seats. At 
about the same time, the Nasdaq Board would determine the Election Date 
and the Record Date.\8\ Promptly after selection of the Election Date, 
Nasdaq would distribute (via regular mail and/or e-mail) and post on 
its Web site a Notice to Members (i) announcing the Election Date and 
the List of Candidates, and (ii) describing the procedures for Nasdaq 
Members to nominate candidates for election at the next annual meeting. 
The process and timeframes for members to nominate additional 
candidates for election would be the same as provided under the current 
By-Laws. If, by the date on which a Nasdaq member may no longer submit 
a timely nomination, there is only one candidate for each Member 
Representative Director seat, the Member Representative Directors would 
be elected by The Nasdaq Stock Market, Inc., Nasdaq's sole ``member'' 
within the meaning of the Delaware Limited Liability Company Act, 
directly from the list of candidates nominated by the Member Nominating 
Committee. If, however, there is more than one candidate for a seat 
(i.e., if there is a contested election), the full list of candidates 
will be submitted for a member vote, just as it is under the

[[Page 57084]]

current By-Laws. These proposed changes will be effected through 
amendments to Articles I and II of the By-Laws of the LLC Agreement.\9\ 
Nasdaq is also amending Article II, Section 2 to provide that in the 
event of a contested election, votes may be cast until 11:59 p.m. 
(rather than 5 p.m.) on the Election Date.
---------------------------------------------------------------------------

    \8\ As amended, Article I(aa) of Nasdaq's By-Laws would define 
``Record Date'' as a date selected by the Board for the purpose of 
determining the Nasdaq Members entitled to vote for the election of 
Member Representative Directors on an Election Date in the event of 
a Contested Election.
    \9\ A portion of the LLC Agreement is denominated as the ``By-
Laws'' because of the similarity of its subject matter to corporate 
by-laws. Under Delaware law, however, the By-Laws are part of the 
same governing document as the rest of the LLC Agreement.
---------------------------------------------------------------------------

    Second, Nasdaq proposes to amend the LLC Agreement to remove out-
of-date references to its initial directors and officers and to its 
transition to commencing operations as a national securities exchange. 
Specifically, Nasdaq is amending Sections 9(a) and 10 of the LLC 
Agreement and Article I of the By-Laws to remove references to initial 
officers and directors; deleting Schedules C and D of the LLC 
Agreement, which listed the initial officers and directors; and 
deleting Section 29, which governed the transitional period between the 
formation of Nasdaq and its commencing operations as a national 
securities exchange.\10\ Nasdaq also proposes to amend Section 9(a) of 
the LLC Agreement to clarify that at least 20% of Nasdaq's directors 
shall be Member Representative Directors. The change serves to clarify 
that in a circumstance where the Board opted to reduce its size after 
the resignation of a Director other than a Member Representative 
Director, it would not be required to remove previously elected Member 
Representative Directors in order to maintain the percentage of Member 
Representative Directors at precisely 20%.
---------------------------------------------------------------------------

    \10\ Up-to-date information regarding the current directors of 
Nasdaq and its parent corporation, The Nasdaq Stock Market, Inc., is 
maintained at http://ir.nasdaq.com/directors.cfm (with a link 

provided from http://www.nasdaq.com). As provided by Rule 6a-2 under the 

Act, 17 CFR 240.6a-2, Nasdaq certifies that information regarding 
the officers of Nasdaq is kept up to date and is available to the 
Commission and the public upon request, and is filed with the 
Commission as an amendment to Form 1 every three years.
---------------------------------------------------------------------------

    Third, Nasdaq proposes to amend Section 27 of the LLC Agreement and 
Article VIII, Section 1 of the By-Laws in the LLC Agreement to provide 
that amendments to the LLC Agreement (including the By-Laws) must be 
approved by the Nasdaq Board and also reflected in a written agreement 
executed by The Nasdaq Stock Market, Inc., as sole member of Nasdaq 
within the meaning of the Delaware Limited Liability Company Act. The 
former requirement reflects the LLC Agreement's status as a rule of 
Nasdaq, while the latter requirement reflects Delaware law.\11\
---------------------------------------------------------------------------

    \11\ Changes to the LLC Agreement also require a filing pursuant 
to Section 19(b) of the Act.
---------------------------------------------------------------------------

    Fourth, Nasdaq proposes to amend the compositional requirements of 
the Quality of Markets Committee (the ``QMC'') in Article III, Section 
6 of the By-Laws to provide that the number of Non-Industry members of 
the QMC must equal or exceed the number of Industry members. The 
current By-Law requires that QMC must be equally balanced between 
Industry and Non-Industry members. This change is consistent with 
certain undertakings made by Nasdaq with regard to the composition of 
this committee.\12\
---------------------------------------------------------------------------

    \12\ See Letter from Edward S. Knight, Executive Vice President, 
General Counsel, and Chief Regulatory Officer, Nasdaq, to Robert 
L.D. Colby, Acting Director, Division of Market Regulation, 
Commission (January 11, 2006) (affirming that Nasdaq shall comply 
with certain undertakings in a 1996 Order of the Commission); In the 
Matter of National Association of Securities Dealers, Inc., Order 
Instituting Public Proceedings Pursuant to Section 19(h)(1) of the 
Securities Exchange Act of 1934, Making Findings, and Imposing 
Remedial Sanctions, Securities Exchange Act Release No. 37538 
(August 8, 1996) (the ``NASD Order'') (requiring ``at least fifty 
percent independent public and non-industry membership'' in the QMC) 
(emphasis added).
---------------------------------------------------------------------------

    Fifth, Nasdaq proposes to amend the compositional requirements of 
the Arbitration and Mediation Committee (the ``Arbitration Committee'') 
in Article III, Section 6 of the By-Laws to provide that the size of 
the committee shall be between 3 and 10 members (rather than 10 to 25 
members, as currently required). Because NASD manages an arbitration 
and mediation program for use of Nasdaq members pursuant to a 
regulatory services agreement between Nasdaq and NASD, Nasdaq has 
appointed the members of NASD's Arbitration and Mediation Committee 
also to serve on Nasdaq's committee. Because the role of Nasdaq's 
committee is minimized by the overlap between Nasdaq's and NASD's 
arbitration rules and the role of NASD in administering the program, 
Nasdaq believes that a smaller Nasdaq committee would be more 
appropriate. Nasdaq would still expect to designate members of the NASD 
committee for service on its committee, and the committee would 
continue to comply with the balance requirements in the current By-
Laws.\13\
---------------------------------------------------------------------------

    \13\ See NASD Order, supra note 12, (requiring ``at least fifty 
percent independent public and non-industry membership'' in the 
Arbitration Committee).
---------------------------------------------------------------------------

    Sixth, Nasdaq proposes to amend the compositional requirements of 
the Nasdaq Review Council (the ``NRC'') in Article VI of the By-Laws to 
provide that the size of the NRC shall be between 8 and 12 members 
(rather than 12 to 14). The NRC is an appellate body empowered to 
review disciplinary decisions under Nasdaq rules. Because Nasdaq and 
NASD are parties to an agreement under Rule 17d-2 of the Act \14\ that 
allocates responsibility to NASD for enforcing a wide range of common 
rules with respect to common members, the caseload of the NRC is likely 
to be considerably lower than that of the NASD's comparable committee, 
the National Adjudicatory Council. Accordingly, Nasdaq believes that a 
smaller size for the NRC will be consistent with the efficient 
discharge of its responsibilities. Nasdaq is also proposing an 
amendment to allow NRC members to serve two consecutive three-year 
terms. A comparable provision is in effect for Nasdaq's other appellate 
review body, the Nasdaq Listing and Hearing Review Council.
---------------------------------------------------------------------------

    \14\ 17 CFR 240.17d-2.
---------------------------------------------------------------------------

    Seventh, pursuant to requests made by Commission staff at the end 
of Nasdaq's exchange registration process, Nasdaq is amending Article 
IX, Section 1 of the By-Laws (i) to include an explicit reference to 
the authority of the Nasdaq Board to adopt rules relating to 
arbitration between members and between members and customers or 
others, and (ii) to delete a sentence that might be construed to 
contain an excessively broad description of the authority of the Nasdaq 
Board with respect to the operation of Nasdaq rules.\15\
---------------------------------------------------------------------------

    \15\ Nasdaq notes that the deletion of a reference to the 
Board's authority to issue exemptions from Nasdaq rules should not 
be construed to limit Nasdaq's authority under rules that, by their 
terms, explicitly authorize waivers or exemptions. See, e.g., Nasdaq 
Rules 1070 and 4510.
---------------------------------------------------------------------------

    Finally, Nasdaq is amending Article III, Sections 2 and 5, and 
Article VIII, Section 2 of the By-Laws to correct typographical errors.
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of Section 6 of the Act,\16\ in general, and with 
Section 6(b)(3) and (b)(5) of the Act,\17\ in particular, in that the 
proposal is designed to assure a fair representation of Nasdaq members 
in the selection of its directors, and to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, to remove impediments to

[[Page 57085]]

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. Nasdaq believes that the changes will materially enhance the 
efficiency of its governance processes while continuing to ensure a 
fair representation of its members in the selection of its directors.
---------------------------------------------------------------------------

    \16\ 15 U.S.C. 78f.
    \17\ 15 U.S.C. 78f(b)(3) and (5).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    Nasdaq does not believe that the proposed rule change will result 
in any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act, as amended.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve such proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or     Send an e-mail to rule-comments@sec.gov. Please include 

File Number SR-NASDAQ-2007-068 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-NASDAQ-2007-068. 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, 100 F Street, 
NE., Washington, DC 20549, on official business days between the hours 
of 10 am and 3 pm. Copies of such filing also will be available for 
inspection and copying at the principal office of Nasdaq. 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-NASDAQ-2007-068 and should 
be submitted on or before October 26, 2007.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\18\
---------------------------------------------------------------------------

    \18\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Nancy M. Morris,
Secretary.
 [FR Doc. E7-19672 Filed 10-4-07; 8:45 am]

BILLING CODE 8011-01-P