Document ID: SEC-2006-0289-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: Pacific Exchange, Inc.
Posted Date: 2006-03-06T05:00Z

[Federal Register: March 6, 2006 (Volume 71, Number 43)]
[Notices]               
[Page 11271-11277]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr06mr06-79]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53383; File No. SR-PCX-2005-134]

 
Self-Regulatory Organizations; Pacific Exchange, Inc.; Order 
Approving Proposed Rule Change and Amendment No. 1 and Notice of Filing 
and Order Granting Accelerated Approval to Amendment No. 2 Relating to 
the Certificate of Incorporation and Bylaws of Archipelago Holdings, 
Inc.

February 27, 2006.

I. Introduction

    On December 5, 2005, pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ the 
Pacific Exchange, Inc. (``PCX'' or ``Exchange'') filed with the 
Securities and Exchange Commission (``Commission'') a proposed rule 
change in connection with the proposed merger (``Merger'') of New York 
Stock Exchange, Inc., a New York Type A not-for-profit corporation 
(``NYSE''), and Archipelago Holdings, Inc., a Delaware corporation and 
the parent company of the Exchange (``Archipelago''). On December 15, 
2005, the Exchange amended its proposal.\3\ The proposed rule change, 
as amended, was published for comment on January 12, 2006.\4\ On 
February 13, 2006, the Exchange filed Amendment No. 2.\5\ This order 
approves the proposed rule change, as amended, grants accelerated 
approval to Amendment No. 2 to the proposed rule change, and solicits

[[Page 11272]]

comments from interested persons on Amendment No. 2.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 replaced PCX's original filing in its 
entirety.
    \4\ Securities Exchange Act Release No. 53077 (January 9, 2006), 
71 FR 2095.
    \5\ In Amendment No. 2, the Exchange clarified that the proposed 
rule change would become operative concurrently with the closing of 
the Merger. The complete text of Amendment No. 2 is available on the 
Commission's Web site http://www.sec.gov/rules/sro.shtml, at the 

Commission's Public Reference Room, at the Exchange, and on PCX's 
Web site, http://www.pacificex.com.

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    After careful review, the Commission finds the proposed rule 
change, as amended, is consistent with the requirements of the Act and 
the rules and regulations thereunder applicable to a national 
securities exchange.\6\ In particular, the Commission finds that the 
proposed rule change, as amended, is consistent with Section 6(b)(1) of 
the Act,\7\ which requires a national securities exchange to be so 
organized and have the capacity 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 proposed rule change, as amended, is consistent with Section 
6(b)(5) of the Act,\8\ 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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    \6\ 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).
    \7\ 15 U.S.C. 78f(b)(1).
    \8\ 15 U.S.C. 78f(b)(5).
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A. Accelerated Approval of Amendment No. 2

    The Commission also finds good cause for approving Amendment No. 2 
to the proposed rule change prior to the thirtieth day after publishing 
notice of Amendment No. 2 in the Federal Register pursuant to Section 
19(b)(2) of the Act.\9\
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    \9\ 15 U.S.C. 78s(b)(2). Pursuant to Section 19(b)(2) of the 
Act, 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.
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    In Amendment No. 2, the Exchange represented that the proposed rule 
change would be operative concurrently with the closing of the Merger. 
Amendment No. 2 does not otherwise modify or change PCX's proposal. The 
Commission believes that Amendment No. 2 clarifies the timing of the 
rule changes proposed by PCX, raises no novel issues, and is consistent 
with the Act. Therefore, the Commission finds good cause exists to 
accelerate approval of Amendment No. 2, pursuant to Section 19(b)(2) of 
the Act.\10\
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    \10\ 15 U.S.C. 78s(b)(2).
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B. Solicitation of Comment

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 2, including whether Amendment No. 2 
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-2005-134 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-2005-134. 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 Exchange. 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 
Amendment No. 2 of File Number SR-PCX-2005-134 and should be submitted 
on or before March 27, 2006.

C. Comments on the Proposal

    The Commission received four comment letters on the proposed rule 
change.\11\ PCX filed a response to the comment letters on February 9, 
2006 and a further response on February 27, 2006.\12\ Each of the 
commenters expressed concern about Gerald Putnam's fitness to serve as 
an officer of NYSE Group, Inc. (``NYSE Group'') or to lead the NYSE 
upon consummation of the Merger.\13\
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    \11\ See letters from James L. Kopecky, Attorney, James L. 
Kopecky, P.C., to Christopher Cox, Chairman, Commission, dated 
January 16, 2006 (``Kopecky Letter''); Michael Kanovitz, Attorney, 
Loevy & Loevy, to Nancy M. Morris, Secretary, Commission, dated 
February 2, 2006 (enclosing a statement from Lewis J. Borsellino to 
the Commission); Philip J. Nathanson, Attorney, Philip J. Nathanson 
& Associates, to Christopher Cox, Chairman, Commission, dated 
February 3, 2006 (following up on the Kopecky Letter); and letter 
from Fane Lozman to Christopher Cox, Chairman, Commission, dated 
February 22, 2006, with attachments (responding to PCX Response to 
Comments, infra note 12).
    \12\ See letters from Kevin J. P. O'Hara, Chief Administrative 
Officer, General Counsel & Secretary, PCX, to Nancy M. Morris, 
Secretary, Commission, dated February 8, 2006 (``PCX Response to 
Comments'') and February 24, 2006.
    \13\ After the Merger, NYSE Group will be a publicly traded 
company and the holding company for the businesses of the NYSE and 
Archipelago. New York Stock Exchange LLC will be a wholly-owned 
subsidiary of NYSE Group and will succeed to the registration of the 
NYSE as a national securities exchange. Mr. Putnam is currently the 
chairman of the board of directors and chief executive officer of 
Archipelago and the chairman of PCX. Upon completion of the Merger, 
it is intended that Mr. Putnam will be named as co-president and 
chief operating officer of NYSE Group. See PCX Response to Comments, 
supra note 12, at 2.
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    The issue of Mr. Putnam's fitness to serve as an officer or 
director of a public company or the NYSE is not before the Commission 
in the context of this rule filing. Pursuant to Section 19(b)(1) of the 
Act,\14\ a self-regulatory organization (``SRO'') (such as PCX) is 
required to file with the Commission any proposed rule or any proposed 
change in, addition to, or deletion from the rules of such SRO. 
Further, pursuant to Section 19(b)(2) of the Act,\15\ the Commission 
shall approve a proposed rule change filed by an SRO if the Commission 
finds that such proposed rule change is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to the SRO. PCX is not providing in this filing for any 
particular person to serve as an officer or director of NYSE Group or 
any of its subsidiaries. In addition, Section 19(h)(4) of the Act \16\ 
authorizes the Commission, if in its opinion such action is necessary 
or appropriate in the public interest, for the protection of investors, 
or otherwise in furtherance of the purposes of the Act, to remove or 
censure an officer or director of a national securities exchange if it 
finds, after notice and opportunity for a hearing, that such officer or 
director has

[[Page 11273]]

willfully violated any provision of the Act, the rules or regulations 
thereunder, or the rules of such exchange, willfully abused his 
authority, or without reasonable justification or excuse has failed to 
enforce compliance with any such provision by any member or person 
associated with a member.
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    \14\ 15 U.S.C. 78s(b)(1).
    \15\ 15 U.S.C. 78s(b)(2).
    \16\ 15 U.S.C. 78s(h)(4).
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II. Discussion

    On April 20, 2005, the NYSE and Archipelago entered into an 
Agreement and Plan of Merger (``Merger Agreement'').\17\ Following the 
Merger, the businesses of the NYSE and Archipelago will be held under a 
single, publicly traded holding company, NYSE Group. In the Merger, 
NYSE members will receive cash and/or shares of NYSE Group common 
stock, and Archipelago stockholders will receive solely shares of NYSE 
Group common stock.
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    \17\ See Amendment No. 3 to the Registration Statement on Form 
S-4, Registration No. 333-126780, filed with the Commission on 
November 3, 2005, for a description of the Merger Agreement and the 
transactions contemplated thereby. See also Securities Exchange Act 
Release No. 53382 (February 27, 2006) (SR-NYSE-2005-77) (``NYSE 
Order'').
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    PCX proposes to allow NYSE Group and its related persons to wholly 
own and vote all of the outstanding capital stock of Archipelago upon 
consummation of the Merger, subject to certain exceptions described 
herein. PCX also proposes certain new rules of PCX and PCX Equities, 
Inc. (``PCXE'') prohibiting certain relationships between NYSE Group 
and PCX members. Finally, PCX proposes to amend the rules of PCX and 
PCXE to impose restrictions on certain rights of PCX members with 
respect to the nomination and election of the directors of PCX and 
PCXE.

A. NYSE Group Ownership of Archipelago

    The Archipelago Certificate of Incorporation imposes certain 
limitations on ownership and voting of Archipelago stock, unless waived 
by the board of directors of Archipelago (``Archipelago Board'') and 
approved by the Commission.
1. Current PCX Rules
a. Ownership Limitation in the Archipelago Certificate of Incorporation
    The Archipelago Certificate of Incorporation currently provides 
that no person,\18\ either alone or together with its related 
persons,\19\ may own beneficially shares of Archipelago stock 
representing in the aggregate more than 40% of the then outstanding 
votes entitled to be cast on any matter (``Ownership Limitation''). The 
Ownership Limitation will apply unless and until (1) a person, either 
alone or with its related persons, delivers to the Archipelago Board a 
notice in writing regarding its intention to acquire shares of 
Archipelago stock that would cause such person, either alone or with 
its related persons, to own beneficially shares of stock of Archipelago 
in excess of the Ownership Limitation, at least 45 days (or such 
shorter period as the Archipelago Board may expressly consent) prior to 
the intended acquisition, and (2) such person, either alone or with its 
related persons, receives prior approval by the Archipelago Board and 
the Commission to exceed the Ownership Limitation.\20\ Specifically, 
(1) The Archipelago Board must adopt a resolution approving such person 
and its related persons to exceed the Ownership Limitation, (2) the 
resolution must be filed with the Commission under Section 19(b) of the 
Act,\21\ and (3) such proposed rule change must be approved by the 
Commission and become effective thereunder.\22\
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    \18\ See Archipelago Certificate of Incorporation, Article 
Fourth H(2) for the definition of a ``Person.''
    \19\ See Archipelago Certificate of Incorporation, Article 
Fourth H(3) for the definition of ``Related Persons.''
    \20\ Archipelago Certificate of Incorporation, Article Fourth 
D(1)(a).
    \21\ 15 U.S.C. 78s(b).
    \22\ Archipelago Certificate of Incorporation, Article Fourth 
D(1)(a).
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    Pursuant to the Archipelago Certificate of Incorporation, subject 
to its fiduciary obligations under the Delaware General Corporation 
Law, as amended (``DGCL''), before adopting any such resolution, the 
Archipelago Board must first determine that: (1) Such acquisition of 
beneficial ownership by such person, either alone or with its related 
persons, would not impair any of Archipelago's, PCX's, or PCXE's 
ability to discharge its responsibilities under the Act and the rules 
and regulations thereunder and is otherwise in the best interests of 
Archipelago and its stockholders; (2) such acquisition of beneficial 
ownership by such person, either alone or with its related persons, 
would not impair the Commission's ability to enforce the Act; and (3) 
such person and its related persons are not subject to any statutory 
disqualification.\23\
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    \23\ Archipelago Certificate of Incorporation, Article Fourth 
D(1)(b). The term ``statutory disqualification'' is defined in 
Section 3(a)(39) of the Act, 15 U.S.C. 78c(a)(39). In making such 
determinations, the Archipelago Board may impose any conditions and 
restrictions on such person and its related persons owning any 
shares of stock of Archipelago entitled to vote on any matter as the 
Archipelago Board in its sole discretion deems necessary, 
appropriate, or desirable in furtherance of the objectives of the 
Act and the governance of Archipelago. Archipelago Certificate of 
Incorporation, Article Fourth D(1)(b).
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    In addition, the Archipelago Certificate of Incorporation provides 
that for so long as Archipelago Exchange, L.L.C. (``ArcaEx'') remains a 
facility of PCX and PCXE and the Facility Services Agreement among 
Archipelago, PCX, and PCXE, dated as of March 22, 2002 (``Facility 
Services Agreement''), which currently governs the regulatory 
relationship of PCX and PCXE to ArcaEx, remains in full force and 
effect, no Equity Trading Permit Holder (``ETP Holder''),\24\ either 
alone or with its related persons, shall be permitted at any time to 
own beneficially shares of Archipelago stock representing in the 
aggregate more than 20% of the then outstanding votes entitled to be 
cast on any matter.\25\ Furthermore, unlike the Ownership Limitation 
described earlier, the Archipelago Certificate of Incorporation does 
not give the Archipelago Board the authority to waive the 20% ownership 
limitation with respect to ETP Holders and their related persons.
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    \24\ ``ETP Holder'' is defined in PCXE Rule 1.1.
    \25\ Archipelago Certificate of Incorporation, Article Fourth 
D(2).
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b. Voting Limitation in the Archipelago Certificate of Incorporation
    The Archipelago Certificate of Incorporation also currently 
provides that no person, either alone or with its related persons, 
shall be entitled to (1) vote or cause the voting of shares of 
Archipelago stock to the extent such shares represent in the aggregate 
more than 20% of the then outstanding votes entitled to be cast on any 
matter (``Voting Limitation'') or (2) enter into any agreement, plan, 
or arrangement not to vote shares, the effect of which agreement, plan, 
or arrangement would be to enable any person, either alone or with its 
related persons, to vote, possess the right to vote, or cause the 
voting of shares that would represent in the aggregate more than 20% of 
the then outstanding votes entitled to be cast on any matter 
(``Nonvoting Agreement Prohibition'').\26\ The Voting Limitation and 
the Nonvoting Agreement Prohibition shall apply unless and until (1) a 
person, either alone or with its related persons, delivers to the 
Archipelago Board a notice in writing regarding such person's intention 
to vote, possess the right to vote, or cause the voting of shares of 
Archipelago stock that would cause such person, either alone or with 
its related persons, to violate the Voting Limitation or the

[[Page 11274]]

Nonvoting Agreement Prohibition, at least 45 days (or such shorter 
period as the Archipelago Board may expressly consent) prior to the 
intended vote and (2) such person, either alone or with its related 
persons, receives prior approval from the Archipelago Board and the 
Commission to exceed the Voting Limitation or enter into an agreement, 
plan, or arrangement not otherwise allowed pursuant to the Nonvoting 
Agreement Prohibition.\27\ Specifically, (1) The Archipelago Board must 
adopt a resolution approving such person and its related persons to 
exceed the Voting Limitation or to enter into an agreement, plan, or 
arrangement not otherwise allowed pursuant to the Nonvoting Agreement 
Prohibition, (2) the resolution must be filed with the Commission under 
Section 19(b) of the Act,\28\ and (3) such proposed rule change must be 
approved by the Commission and become effective thereunder.\29\
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    \26\ Archipelago Certificate of Incorporation, Article Fourth 
C(1).
    \27\ Archipelago Certificate of Incorporation, Article Fourth 
C(2).
    \28\ 15 U.S.C. 78s(b).
    \29\ Archipelago Certificate of Incorporation, Article Fourth 
C(2).
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    Pursuant to the Archipelago Certificate of Incorporation, subject 
to its fiduciary obligations under the DGCL, before adopting any such 
resolution, the Archipelago Board must first determine that: (1) The 
exercise of such voting rights or the entering into of such agreement, 
plan, or arrangement, as applicable, by such person, either alone or 
with its related persons, would not impair Archipelago's, PCX's, or 
PCXE's ability to discharge its responsibilities under the Act and the 
rules and regulations thereunder and is otherwise in the best interests 
of Archipelago and its stockholders; (2) the exercise of such voting 
rights or the entering into of such agreement, plan, or arrangement 
would not impair the Commission's ability to enforce the Act; (3) such 
person and its related persons are not subject to any statutory 
disqualification; \30\ and (4) in the case of a resolution to approve 
the exercise of voting rights in excess of the Voting Limitation, for 
so long as ArcaEx remains a facility of PCX and PCXE and the Facility 
Services Agreement is in full force and effect, neither such person nor 
its related persons are ETP Holders.\31\
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    \30\ See supra note 23.
    \31\ Archipelago Certificate of Incorporation, Article Fourth 
C(3). In making such determinations, the Archipelago Board may 
impose any conditions and restrictions on such person and its 
related persons owning any shares of Archipelago stock entitled to 
vote on any matter as the Archipelago Board in its sole discretion 
deems necessary, appropriate, or desirable in furtherance of the 
objectives of the Act and the governance of Archipelago. Id.
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c. Additional Matters Relating to OTP Holders and OTP Firms of PCX
    Archipelago's amended and restated bylaws (``Archipelago Bylaws'') 
provide that the Archipelago Board will not adopt any resolution 
waiving the Voting Limitation, the Nonvoting Agreement Prohibition, and 
the Ownership Limitation with respect to any Options Trading Permit 
Holder (``OTP Holder'') \32\ or Options Trading Permit Firm (``OTP 
Firm'') \33\ or its related persons.\34\ PCX rules provide that for as 
long as Archipelago controls, directly or indirectly, PCX, no OTP 
Holder or OTP Firm, either alone or together with its related persons, 
shall: (i) Own beneficially shares of Archipelago stock representing in 
the aggregate more than 20% of the then outstanding votes entitled to 
be cast on any matter; (ii) have the right to vote, vote, or cause the 
voting of shares of Archipelago stock to the extent such shares 
represent in the aggregate more than 20% of the then outstanding votes 
entitled to be cast on any matter; or (iii) enter into any agreement, 
plan, or arrangement not to vote shares of Archipelago stock, the 
effect of which would enable any person, either alone or together with 
its related persons, to vote, possess the right to vote, or cause the 
voting of shares what would represent in the aggregate more than 20% of 
the then outstanding votes entitled to be cast on any matter.\35\
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    \32\ ``OTP Holder'' is defined in PCX Rule 1.1.
    \33\ ``OTP Firm'' is defined in PCX Rule 1.1.
    \34\ Archipelago Bylaws, Section 6.8(d). This provision of the 
Archipelago Bylaws may not be amended, modified, or repealed unless 
such amendment, modification, or repeal is filed with and approved 
by the Commission or approved by Archipelago stockholders voting not 
less than 80% of the then outstanding votes entitled to be cast in 
favor of any such amendment, modification, or repeal. Archipelago 
Bylaws, Section 6.8(g). 35 See PCX Rules 3.4(a) and (b).
    \35\ See PCX Rules 3.4(a) and (b).
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2. Resolution of the Archipelago Board
    Under the terms of the Merger Agreement, NYSE Group will wholly own 
and vote all of the outstanding capital stock of Archipelago upon 
consummation of the Merger. Absent a waiver, the Merger would cause 
NYSE Group to violate the Ownership Limitation and the Voting 
Limitation. Accordingly, as required by the Archipelago Certificate of 
Incorporation, on October 19, 2005, NYSE Group delivered a written 
notice to the Archipelago Board requesting approval of its ownership 
and voting of Archipelago stock in excess of the Ownership Limitation 
and the Voting Limitation. On October 20, 2005, the Archipelago Board 
adopted a resolution approving the request.\36\ The Exchange then filed 
the resolution with the Commission under Section 19(b) of the Act \37\ 
and requested that, upon consummation of the Merger, NYSE Group be 
allowed to wholly own and vote all the outstanding common stock of 
Archipelago, either alone or with its related persons, except for any 
related person of NYSE Group that is an ETP Holder, an OTP Holder, or 
an OTP Firm.
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    \36\ In adopting the resolution approving NYSE Group's request, 
the Archipelago Board determined that (1) the acquisition of 
beneficial ownership of, and the exercise of voting rights with 
respect to, 100% of the outstanding shares of Archipelago common 
stock by NYSE Group, either alone or with its related persons, would 
not impair any of Archipelago's, PCX's, or PCXE's ability to 
discharge its responsibilities under the Act and the rules and 
regulations thereunder and are otherwise in the best interests of 
Archipelago and its stockholders; (2) such acquisition would not 
impair the Commission's ability to enforce the Act; (3) neither NYSE 
Group nor any of its related persons is subject to any statutory 
disqualification; and (4) neither NYSE Group nor any of its related 
persons is an ETP Holder, OTP Holder, or OTP Firm.
    \37\ 15 U.S.C. 78s(b).
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    The Commission notes that the NYSE Group Certificate of 
Incorporation imposes certain restrictions on NYSE Group stockholders' 
ability to own and vote shares of stock of NYSE Group similar to those 
contained in the Archipelago Certificate of Incorporation and PCX 
rules.\38\ These ownership and voting limitations are designed to 
prevent a shareholder or group of shareholders acting together from 
exercising undue influence or control over the operations of NYSE 
Group's regulated subsidiaries, including PCX and NYSE Regulation, Inc. 
(``NYSE Regulation''), which will carry out certain regulatory services 
on behalf of PCX.\39\
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    \38\ The Commission is today approving proposed rule changes 
filed by the NYSE in connection with the Merger. See NYSE Order, 
supra note 17.
    \39\ PCX and NYSE Regulation intend to enter into a Regulatory 
Services Agreement specifying the regulatory functions that NYSE 
Regulation will perform.
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    Specifically, the NYSE Group Certificate of Incorporation provides 
that no person, either alone or together with its related persons, may 
at any time beneficially own shares of NYSE Group stock representing in 
the aggregate more than 20% of the then outstanding votes entitled to 
be cast on any matter.\40\ The

[[Page 11275]]

NYSE Group Certificate of Incorporation also provides that no person, 
either alone or together with its related persons, will be entitled to 
vote or cause the voting of shares of NYSE Group stock representing in 
the aggregate more than 10% of the total number of votes entitled to be 
cast on any matter, and no person, either alone or together with its 
related persons, may acquire the ability to vote more than 10% of the 
aggregate number of votes being cast on any matter by virtue of 
agreements entered into with other persons not to vote shares of NYSE 
Group's outstanding capital stock.\41\ Moreover, the NYSE Group 
Certificate of Incorporation includes a provision restricting the NYSE 
Group board of directors (``NYSE Group Board'') from waiving these 
ownership and voting limitations for ETP Holders, OTP Holders, and OTP 
Firms that is analogous to provisions in the current Archipelago 
Certificate of Incorporation and Archipelago Bylaws. Specifically, like 
Archipelago, the NYSE Group Board will be prohibited from waiving the 
applicable ownership and voting limitations in excess of 20% for ETP 
Holders, OTP Holders, and OTP Firms.\42\
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    \40\ In the event that a person, either alone or together with 
its related persons, beneficially owns shares of stock of NYSE Group 
in excess of the 20% threshold, such person and its related persons 
will be obligated to sell promptly, and NYSE Group will be obligated 
to purchase promptly, at a price equal to the par value of such 
shares of stock and to the extent that funds are legally available 
for such purchase, that number of shares necessary to reduce the 
ownership level of such person and its related persons to below the 
permitted threshold, after taking into account that such repurchased 
shares will become treasury shares and will no longer be deemed to 
be outstanding. See NYSE Order, supra note 17.
    \41\ NYSE Group will disregard any such votes purported to be 
cast in excess of this limitation. See id.
    \42\ See id.
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    The Commission also notes that the NYSE Group Certificate of 
Incorporation contains certain other provisions designed to facilitate 
the ability of the regulated subsidiaries of NYSE Group and the 
Commission to fulfill their regulatory and oversight obligations under 
the Act. These provisions are analogous to provisions contained in the 
Archipelago Certificate of Incorporation and the Archipelago Bylaws and 
relate, in part, to the Commission's access to NYSE Group's books and 
records, the Commission's jurisdiction over NYSE Group and its 
officers, directors, and employees, the protection of confidential 
information, and the filing with the Commission of amendments to NYSE 
Group's governing documents. The Commission therefore finds that it is 
consistent with the Act, in particular Section 6(b)(1) of the Act,\43\ 
to allow NYSE Group and its related persons, other than any related 
person of NYSE Group that is an ETP Holder, OTP Holder, or OTP Firm, to 
wholly own and vote all of the outstanding capital stock of 
Archipelago.
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    \43\ 15 U.S.C. 78f(b)(1).
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B. Certain Relationships Between NYSE Group and OTP Holders, OTP Firms, 
and ETP Holders

    Upon consummation of the Merger, NYSE Group will become the parent 
company of Archipelago and the successor to the NYSE, New York Stock 
Exchange LLC. To protect the integrity and independence of the 
regulatory responsibilities of PCX and PCXE after the consummation of 
the Merger, PCX and PCXE propose certain new rules designed to minimize 
any potential conflicts of interest that may result from ownership 
relationships or affiliations between OTP Holders, OTP Firms, and ETP 
Holders, i.e., PCX members, on the one hand and NYSE Group and its 
subsidiaries, including PCX and PCXE, on the other hand.
    Specifically, proposed PCX Rule 3.10 and proposed PCXE Rule 3.10 
provide that, unless approved by the Commission, (a) no OTP Holder, OTP 
Firm, or ETP Holder shall be affiliated \44\ with NYSE Group or any of 
its affiliated entities, and (b) neither NYSE Group nor any of its 
affiliates shall hold, directly or indirectly, an ownership interest in 
any OTP Firm or ETP Holder. The proposed PCX and PCXE rules further 
provide that any person who fails to meet the requirements described in 
the preceding sentence shall not be eligible to become an OTP Holder, 
OTP Firm, or ETP Holder, as the case may be.\45\ In addition, in the 
event of any failure by any OTP Holder, OTP Firm, or ETP Holder to 
comply with the applicable provisions of the proposed PCX Rule 3.10 and 
proposed PCXE Rule 3.10, PCX or PCXE shall suspend all trading rights 
and privileges of such OTP Holder, OTP Firm, or ETP Holder, as the case 
may be, in accordance with the proposed PCX and PCXE rules, subject to 
the procedures provided therein.\46\
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    \44\ A person ``affiliated'' with a specified person is a person 
that directly, or indirectly through one or more intermediaries, 
controls, is controlled by, or is under common control with, the 
person specified. 17 CFR 240.12b-2.
    \45\ Proposed PCX Rule 3.10(c) and proposed PCXE Rule 3.10(c).
    \46\ The proposed PCX and PCXE rules provide that in the event 
of any such failure to comply with proposed PCX Rule 3.10 and 
proposed PCXE Rule 3.10, respectively, PCX or PCXE shall: (1) 
Provide notice to the applicable OTP Holder, OTP Firm, or ETP 
Holder, as the case may be, within five business days of learning of 
the failure to comply; (2) allow the applicable OTP Holder, OTP 
Firm, or ETP Holder fifteen calendar days to cure any such failure 
to comply; (3) in the event that the applicable OTP Holder, OTP 
Firm, or ETP Holder does not cure such failure to comply within such 
fifteen calendar day cure period, schedule a hearing to occur within 
thirty calendar days following the expiration of such fifteen 
calendar day cure period; and (4) render its decision as to the 
suspension of all trading rights and privileges of the applicable 
OTP Holder, OTP Firm, or ETP Holder no later than ten calendar days 
following the date of such hearing. Proposed PCX Rule 13.2(a)(2)(F) 
and proposed PCXE Rule 11.2(a)(2)(v).
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    The Commission finds that proposed PCX Rule 3.10 and proposed PCXE 
Rule 3.10 are consistent with the Act, in particular Section 6(b)(1) of 
the Act.\47\ These proposed rules are designed to minimize any 
potential conflicts of interest that may result from ownership 
relationships or affiliations between PCX members on the one hand and 
NYSE Group and its affiliates, including PCX and PCXE, on the other 
hand. By proscribing ownership and affiliation between these groups, 
the Commission believes that proposed PCX Rule 3.10 and proposed PCXE 
3.10 will help protect the integrity and independence of the regulatory 
responsibilities of the Exchange after the consummation of the Merger.
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    \47\ 15 U.S.C. 78f(b)(1).
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C. Rights of OTP Holders and ETP Holders With Respect to the Nomination 
and Election of Their Representatives to the PCX Board and PCXE Board

    The bylaws of PCX and PCXE (``PCX Bylaws'' and ``PCXE Bylaws,'' 
respectively) contain certain compositional requirements with respect 
to the boards of directors of PCX and PCXE (``PCX Board'' and ``PCXE 
Board,'' respectively). Specifically, the PCX Bylaws provide that at 
least 20% of the directors of PCX shall consist of individuals 
nominated by trading permit holders, with at least one director 
nominated by ETP Holders and at least one director nominated by OTP 
Holders.\48\ The PCXE Bylaws provide that at least 20% of the directors 
(but no fewer than two directors) of PCXE shall be nominees of the ETP/
Equity ASAP Nominating Committee, as provided under PCXE Rule 3.\49\ 
The procedures for the nomination, appointment, and election of the 
directors of PCX and PCXE are governed by PCX and PCXE rules.\50\ To 
ensure that the director nomination and election processes of each of 
PCX and PCXE are not subject to any undue influence from the 
concentration of rights in any one OTP Holder \51\ or ETP Holder, 
either alone or together with certain affiliates, PCX proposes to amend 
its rules and PCXE's

[[Page 11276]]

rules to limit the participation of affiliated OTP Holders and ETP 
Holders in the director nomination and election processes.
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    \48\ PCX Bylaws, Section 3.02(a).
    \49\ PCXE Bylaws, Section 3.02(a).
    \50\ PCX Rule 3.2(b)(2) and PCXE Rule 3.2(b)(2).
    \51\ Even though OTP Firms also hold options trading permits, 
they do not have any voting rights with respect to the nomination 
and election of the OTP Holder representative on the PCX Board.
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    Specifically, PCX rules currently provide that the PCX nominating 
committee (``PCX Nominating Committee'') shall have seven members, 
consisting of six OTP Holders and one person from the public. The PCX 
Nominating Committee must nominate any candidate for these OTP Holders' 
positions on the PCX Nominating Committee endorsed by the written 
petition of the lesser of 35 OTP Holders or 10% of OTP Holders. PCX 
proposes that no OTP Holder, either alone or together with (x) other 
OTP Holders associated with the same OTP Firm that such OTP Holder is 
associated with \52\ and (y) OTP Holders associated with OTP Firms that 
are affiliated \53\ with the OTP Firm that such OTP Holder is 
associated with, may account for more than 50% of the signatories to 
the petition endorsing a particular petition nominee for an OTP 
Holders' position on the PCX Nominating Committee.
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    \52\ The term ``associated person of a broker or dealer'' means 
any partner, officer, director, or branch manager of such broker or 
dealer (or any person occupying a similar status or performing 
similar functions), any person directly or indirectly controlling, 
controlled by, or under common control with such broker or dealer, 
or any employee of such broker or dealer, except that such term does 
not include any person associated with a broker or dealer whose 
functions are solely clerical or ministerial. 15 U.S.C. 78c(a)(18).
    \53\ See supra note 43.
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    PCX rules also currently provide that, in the event that there are 
more than six nominees to fill the OTP Holders' positions on the PCX 
Nominating Committee as a result of petition by OTP Holders, the PCX 
Nominating Committee must submit the nominees to OTP Holders for 
election.\54\ PCX proposes that no OTP Holder, either alone or together 
with (x) other OTP Holders associated with the same OTP Firm that such 
OTP Holder is associated with and (y) OTP Holders associated with OTP 
Firms that are affiliated with the OTP Firm that such OTP Holder is 
associated with, may account for more than 20% of the votes cast for a 
particular nominee for an OTP Holders' position on the PCX Nominating 
Committee.
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    \54\ PCX Rules 3.2(b)(2)(B).
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    With respect to the nomination and election of the OTP Holder 
representative on the PCX Board, PCX rules currently provide that, in 
addition to the candidate nominated by the PCX Nominating Committee for 
the OTP Holders' position on the PCX Board, the PCX Nominating 
Committee must nominate any eligible candidate endorsed by the written 
petition of the lesser of 35 OTP Holders or 10% of OTP Holders in good 
standing on or before the tenth business day after the PCX Nominating 
Committee publishes its nominee for the PCX Board.\55\ PCX proposes 
that no OTP Holder, either alone or together with (x) other OTP Holders 
associated with the same OTP Firm that such OTP Holder is associated 
with and (y) OTP Holders associated with OTP Firms that are affiliated 
with the OTP Firm that such OTP Holder is associated with, may account 
for more than 50% of the signatories to the petition endorsing a 
particular petition nominee for the OTP Holders' position on the PCX 
Board.
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    \55\ PCX Rule 3.2(b)(2)(C)(ii).
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    In addition, PCX rules currently provide that if there are two or 
more nominees for the PCX Holder's position on the PCX Board as a 
result of petition by OTP Holders, the PCX Nominating Committee must 
submit the contested nomination(s) to OTP Holders for election.\56\ PCX 
proposes that no OTP Holder, either alone or together with (x) other 
OTP Holders associated with the same OTP Firm that such OTP Holder is 
associated with and (y) OTP Holders associated with OTP Firms that are 
affiliated with the OTP Firm that such OTP Holder is associated with, 
may account for more than 20% of the votes cast for a particular 
nominee for the OTP Holders' position on the PCX Board.
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    \56\ PCX Rule 3.2(b)(2)(C)(iii).
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    Similarly, PCXE rules currently provide that the PCXE nominating 
committee (``PCXE Nominating Committee'') shall have seven members, 
consisting of six ETP Holders and one person from the public. The PCXE 
Nominating Committee must nominate any candidate for these ETP Holders' 
positions on the PCXE Nominating Committee endorsed by the written 
petition of at least 10% of ETP Holders. PCX proposes that no ETP 
Holder, either alone or together with other ETP Holders who are deemed 
its affiliates,\57\ may account for more than 50% of the signatories to 
the petition endorsing a particular petition nominee for an ETP 
Holders' position on the PCXE Nominating Committee.
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    \57\ See supra note 43.
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    PCXE rules also currently provide that in the event that there are 
more than six nominees to fill the ETP Holders' positions on the PCXE 
Nominating Committee as a result of petition by ETP Holders, the PCXE 
Nominating Committee must submit the nominees to ETP Holders for 
election.\58\ PCX proposes that no ETP Holder, either alone or together 
with other ETP Holders who are deemed its affiliates, may account for 
more than 20% of the votes cast for a particular nominee for an ETP 
Holders' position on the PCXE Nominating Committee.
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    \58\ PCXE Rules 3.2(b)(2)(B)(iii).
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    With respect to the nomination and election of the ETP Holder 
representatives on the PCX Board and PCXE Board, PCXE rules currently 
provide that in addition to the candidates nominated by the PCXE 
Nominating Committee for the ETP Holders' positions on the PCX Board 
and PCXE Board, the PCXE Nominating Committee must nominate any 
eligible candidate endorsed by the written petition of at least 10% of 
ETP Holders in good standing to the PCX Board or PCXE Board, as the 
case may be, within the time period set forth in PCXE rules.\59\ PCX 
proposes that no ETP Holder, either alone or together with other ETP 
Holders who are deemed its affiliates, may account for more than 50% of 
the signatories to a petition endorsing a particular petition nominee 
for an ETP Holders' position on the PCX Board or PCXE Board.
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    \59\ PCXE Rule 3.2(b)(2)(C)(i).
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    In addition, PCXE rules also currently provide that if there are 
three or more nominees for the ETP Holders' positions on the PCXE Board 
or two or more nominees for the ETP Holder's position on the PCX Board, 
the PCXE Nominating Committee shall submit the contested nomination(s) 
to the ETP Holders for election.\60\ PCX proposes that no ETP Holder, 
either alone or together with other ETP Holders who are deemed its 
affiliates, may account for more than 20% of the votes cast for a 
particular nominee for an ETP Holders' position on the PCX Board or 
PCXE Board.\61\
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    \60\ PCXE Rule 3.2(b)(2)(C)(ii).
    \61\ Aside from trading rights that such permit holders are 
entitled to and rights described in this section, the Exchange 
represents that permit holders have no other voting, nomination, 
petition, or other rights under the organizational documents and 
rules of PCX and PCXE, as applicable.
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    The Commission finds that these proposed PCX and PCXE rules related 
to the director nomination and election process are consistent with the 
Act, in particular Section 6(b)(3) of the Act.\62\ These proposed rule 
changes, which will limit the ability of affiliated OTP Holders or ETP 
Holders to control such process, should serve to strengthen and improve 
fair representation of all members. The Commission therefore believes 
that the proposal will help to protect PCX and PCXE Boards from any

[[Page 11277]]

inappropriate influences of a group of related OTP Holders or ETP 
Holders.
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    \62\ 15 U.S.C. 78f(b)(3).
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D. SIP Registration

    Section 11A(b)(1) of the Act \63\ provides for the registration 
with the Commission of a securities information processor (``SIP'') 
\64\ that is acting as an exclusive processor.\65\ Because ArcaEx 
engages on an exclusive basis on behalf of the Exchange in collecting, 
processing, or preparing for distribution or publication information 
with respect to transactions or quotations on or effected or made by 
means of a facility of the Exchange, it is an exclusive processor that 
is required to register pursuant to Section 11A(b) of the Act.\66\
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    \63\ 15 U.S.C. 78k-1(b)(1).
    \64\ See Section 3(a)(22)(A) of the Act, 15 U.S.C. 
78c(a)(22)(A), for the definition of a SIP. A SRO is explicitly 
excluded from the definition of a SIP.
    \65\ Section 3(a)(22)(B) of the Act, 15 U.S.C. 78c(a)(22)(B), 
defines an exclusive processor. Rule 609 under the Act, 17 CFR 
242.609, requires that the registration of a SIP be on Form SIP, 17 
CFR 249.1001.
    \66\ 15 U.S.C. 78k-1(b)(1). A SRO that is an exclusive processor 
is exempt from registration under Section 11A(b)(1) of the Act 
because it is excluded from designation as a SIP.
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    Section 11A(b)(1) of the Act \67\ provides that the Commission may, 
by rule or order, upon its own motion or upon application by a SIP, 
conditionally or unconditionally exempt any SIP from any provision of 
Section 11A of the Act or the rules or regulation thereunder, if the 
Commission finds that such exemption is consistent with the public 
interest, the protection of investors, and the purposes of Section 11A 
of the Act, including the maintenance of fair and orderly markets in 
securities and the removal of impediments to and perfection of the 
mechanism of a national market system.\68\
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    \67\ 15 U.S.C. 78k-1(b)(1).
    \68\ 15 U.S.C. 78k-1(b)(1). See also Rule 609(c), 17 CFR 
242.609(c).
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    The Commission has determined to grant ArcaEx a temporary exemption 
from registration under Section 11A(b)(1) of the Act and Rule 609 
thereunder for a period of thirty (30) days from the date of closing of 
the Merger, while an application for registration or an application for 
an exemption pursuant to Section 11A(b)(1) of the Act and Rule 609 
thereunder is prepared.\69\ The Commission also has determined to grant 
a conditional continuation of the 30-day temporary exemption from 
registration of ArcaEx, conditioned upon its filing of an application 
for registration or application for an exemption from registration 
within the 30-day time period. Such continuation shall continue for a 
period of 90 days following the end of the 30-day period and will 
afford interested persons an opportunity to submit written comments 
concerning the application filed with the Commission.\70\
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    \69\ See Securities Exchange Act Release No. 12079 (February 6, 
1976) (order granting temporary exemption from SIP registration for 
Nasdaq for (1) a period of 30 days following the consummation of the 
sale of the Nasdaq system to the NASD and the assignment of the 
NASD's rights in such purchase to Nasdaq, a subsidiary of the NASD 
and (2) an additional period of ninety (90) days following the day 
of publication of notice of filing of an application for 
registration or exemption from registration, if such application is 
received within the original 30 days). See also Securities Exchange 
Act Release Nos. 13278 (February 17, 1977) (granting Bradford 
National Clearing Corporation, which was to perform SIP functions 
for the Pacific Exchange, a 90-day temporary exemption from 
registration as a SIP pending Commission determination of Bradford's 
application for a permanent exemption, such 90-day period to begin 
from the consummation of the agreement calling for Bradford's 
assumption of the SIP services) and 27957 (April 27, 1990), 55 FR 
19140 (May 8, 1990) (granting the NASD a 90-day temporary exemption 
from registration of its subsidiary, Market Services, Inc., which 
was to operate the NASD's PORTAL market, as a SIP pending Commission 
review of its application for registration filed with the 
Commission).
    \70\ Publication of notice of the filing of an application for 
registration is required by Section 11A(b)(3) of the Act, 15 U.S.C. 
78k-1(b)(3).
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    ArcaEx currently operates the equities trading facility of PCX and 
is regulated as a facility of PCX.\71\ The Commission therefore finds 
that such temporary exemptions are consistent with the public interest, 
the protection of investors, and the purposes of Section 11A of the 
Act. The exemptions are for a limited period of time during which the 
Commission will have regulatory authority over ArcaEx.
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    \71\ See Securities Exchange Act Release No. 44983 (October 25, 
2001), 66 FR 55225 (November 1, 2001).
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III. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\72\ that the proposed rule change (SR-PCX-2005-134), as amended, 
is approved and Amendment No. 2 is approved on an accelerated basis.
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    \72\ 15 U.S.C. 78s(b)(2).
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    It is therefore further ordered, pursuant to Section 11A(b)(1) of 
the Act,\73\ that ArcaEx shall be exempt from registration as a 
securities information processor for a period of thirty (30) days 
following the date of closing of the Merger.
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    \73\ 15 U.S.C. 78k-1(b)(1).
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    It is therefore further ordered, pursuant to Section 11A(b)(1) of 
the Act,\74\ that upon the filing by ArcaEx of an application for 
registration or an exemption from registration as a securities 
information processor within the 30-day period prescribed above, ArcaEx 
shall be exempt from registration as a securities information processor 
for an additional period of ninety (90) days following the end of the 
original 30-day period.
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    \74\ Id.

    By the Commission (Chairman Cox and Commissioners Glassman, 
Atkins, Campos, and Nazareth).
Nancy M. Morris,
Secretary.
 [FR Doc. E6-3093 Filed 3-3-06; 8:45 am]

BILLING CODE 8010-01-P