Document ID: SEC-2010-1338-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX PHLX, Inc.
Posted Date: 2010-09-03T04:00Z

[Federal Register: September 3, 2010 (Volume 75, Number 171)]
[Notices]               
[Page 54204-54210]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr03se10-112]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-62783; File No. SR-Phlx-2010-104]

 
Self-Regulatory Organizations; NASDAQ OMX PHLX, Inc.; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change Relating to 
the Conversion of NASDAQ OMX PHLX, Inc. to a Limited Liability Company

August 27, 2010.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\, and Rule 19b-4 \2\ thereunder, notice is hereby given 
that on August 16, 2010, NASDAQ OMX PHLX, Inc. (``Phlx'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I and II, below, which Items have been prepared by the Exchange. 
The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to convert NASDAQ OMX PHLX, Inc. from a 
Delaware corporation to a Delaware limited liability company (a 
``Delaware LLC''). This proposal is solely a technical rule change. 
There are no new regulatory issues implicated in this proposal. 
Further, the Exchange is not proposing any material changes, but rather 
only amendments to make technical conforming changes to the formation 
documents to correspond with the LLC conversion. All substantive 
provisions that govern an exchange are consistent with the Act and 
remain intact. The Exchange's proposed formation documents, including 
the Certificate of Formation, Limited Liability Agreement and By-Laws, 
are consistent in form and scope with the most recent governing 
documents that were approved by the Commission.
    The text of the proposed rule change is available on the Exchange's 
Web site at http://www.nasdaqtrader.com/micro.aspx?id=PHLXRulefilings, 
at the principal office of the Exchange, on the Commission's Web site 
at http://www.sec.gov, 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, the Exchange 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. The Exchange 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
    The purpose of the proposed rule change is to convert NASDAQ OMX 
PHLX, Inc. from a Delaware corporation to a Delaware LLC. The NASDAQ 
OMX Group, Inc. acquired NASDAQ OMX PHLX, Inc. (formerly the 
Philadelphia Stock Exchange, Inc.) on July 24, 2008.\3\ At this time, 
The NASDAQ OMX Group, Inc. proposes to convert NASDAQ OMX PHLX, Inc., a 
Delaware corporation to NASDAQ OMX PHLX LLC, a Delaware limited 
liability company (the ``LLC''), to more closely conform its 
organizational structure to that of other NASDAQ OMX entities. Pursuant 
to the Delaware Limited Liability Company Act, as amended from time to 
time (the ``LLC Act''), the LLC will continue the existence of NASDAQ 
OMX PHLX, Inc. and all rights, privileges, powers, property and 
liabilities shall vest in the LLC at the time of conversion. As such, 
this proposed rule change will merely effect a change in entity form of 
the Exchange and have no substantive effect on the current rights and 
obligations of the current members and owners of the Exchange.\4\
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    \3\ See Securities Exchange Act Release Nos. 58179 (July 17, 
2008), 73 FR 42874 (July 23, 2008) (SR-Phlx-2008-31); and 58183 
(July 17, 2008), 73 FR 42850 (July 23, 2008) (SR-NASDAQ-2008-035).
    \4\ Additionally, the proposed limited liability company 
agreement of the Exchange (the ``LLC Agreement'') post-conversion is 
consistent in form and scope with the Second Amended and Restated 
Limited Liability Company Agreement of The Nasdaq Stock Market LLC, 
dated as of July 9, 2009 (the ``NSM LLC Agreement''). See Securities 
Exchange Act Release No. 34-53128 (Jan. 13, 2006), 71 FR 3550 
(January 23, 2006), (approval of Nasdaq's application for 
registration as a national securities exchange).

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[[Page 54205]]

    Following the conversion, the Exchange proposes to be governed by a 
Certificate of Formation, the LLC Agreement and the By-Laws of the LLC 
(the ``LLC By-Laws'') in accordance with the LLC Act. These proposed 
formation documents reflect all of the current rights and obligations 
of the members and owners of the Exchange in the appropriate form of 
governing documents of a Delaware LLC. The specific changes to the 
current documents are discussed in the following sections.
Certificate of Formation
    In order to convert from a Delaware corporation to a Delaware LLC, 
a Certificate of Conversion and a Certificate of Formation of the LLC 
will be filed with the Secretary of State of the State of Delaware. The 
Certificate of Conversion is necessary to effect the conversion of the 
Exchange from a Delaware corporation to a Delaware LLC pursuant to the 
LLC Act. Further, the LLC Act requires that a Certificate of Formation 
of the LLC be filed to accomplish the formation of the LLC. Unlike a 
Certificate of Incorporation which contains actual governing 
provisions, a Certificate of Formation only sets forth three pieces of 
information, the name of the company, the address of the registered 
office and the name and address of the registered agent. As such, only 
the information in the FIRST and SECOND provisions of the Certificate 
of Incorporation are reflected in the Certificate of Formation with 
certain minor changes. First, a Delaware LLC must contain the words 
``LLC'' in its name. In light of this requirement, the name set forth 
in the FIRST provision of the Certificate of Formation of the LLC 
reflects the proposed name ``NASDAQ OMX PHLX LLC'' rather than ``NASDAQ 
OMX PHLX, Inc.'' Additionally, the LLC is referred to as a ``limited 
liability company'' in this provision rather than a ``corporation.''
    The governing provisions of a Delaware LLC need to be set forth in 
the limited liability company agreement of such Delaware LLC. As such, 
the remaining provisions of the Certificate of Incorporation are 
proposed to be reflected in the LLC Agreement and the LLC By-Laws, as 
together, these documents are considered the limited liability company 
agreement of the LLC for purposes of the LLC Act (the 
``Agreement'').\5\
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    \5\ The LLC Act requires a limited liability company agreement 
in order for an entity to be duly formed (see Section 18-201(d) of 
the LLC Act). Additionally, a limited liability company agreement is 
defined in Section 18-101(7) as an agreement that governs the 
affairs of the LLC. Both the LLC By-Laws and the LLC Agreement 
together constitute the limited liability company agreement for 
purposes of the LLC Act.
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Limited Liability Company Agreement
    Following the conversion of the Exchange, it is proposed that the 
Exchange adopt the Agreement. As noted above, the Agreement will 
consist of the LLC Agreement and the LLC By-Laws. The LLC By-Laws 
proposed to be adopted are in substantially the same form as the By-
Laws currently in effect, with certain modifications as further 
explained below.
    The LLC Agreement proposed by the Exchange is similar to that of 
the NSM LLC Agreement. Schedule A of the LLC describes the proposed 
ownership of the limited liability company interests (designated 
therein as ``shares'' of the LLC), which ownership structure is 
identical to that currently in place. The NASDAQ OMX Group, Inc. 
(``NASDAQ OMX Group'') is the sole common shareholder of NASDAQ OMX 
PHLX, Inc. and is proposed to become a member of the Exchange (within 
the meaning of the LLC Act) and the sole owner of all of the Common 
Stock (as defined in the LLC Agreement) of the LLC. There is also the 
PHLX Member Voting Trust (the ``Trust'') which holds the one (1) Series 
A Preferred Stock of NASDAQ OMX PHLX, Inc. The Trust is proposed to 
become a member of the Exchange (within the meaning of the LLC Act) \6\ 
and the owner of the one (1) Series A Preferred Stock (as defined in 
the LLC Agreement) in the LLC.
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    \6\ Neither NASDAQ OMX Group nor the Trust is a member 
organization of the Exchange within the meaning of the By-Laws.
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    The Exchange is incorporating the current By-Laws of NASDAQ OMX 
PHLX, Inc. into the LLC Agreement as Exhibit A to that LLC Agreement. 
The Exchange proposes to make minimal conforming amendments to the 
current By-Laws to comport with the conversion to an LLC. Specifically, 
the Exchange proposes to create an introductory paragraph to the By-
Laws to explain that the By-Laws together with the LLC Agreement 
constitute the LLC Agreement within the meaning of the LLC Act.\7\
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    \7\ See 6 Del. C. Sec.  18-101(7).
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Discussion of the Proposed LLC Agreement
    As mentioned above, the Exchange proposes to adopt an LLC Agreement 
as part of its conversion to a Delaware LLC. Such LLC Agreement will 
contain many provisions set forth in the Certificate of Incorporation 
of the Exchange, with such modifications as are necessary to reflect 
the new entity form. NASDAQ OMX Group and the Trust, the current common 
and preferred stockholders of the Exchange, respectively, would each be 
admitted to, and become a member of, the LLC. As a member of the LLC, 
each such person will hold limited liability company interests in the 
LLC, denoted in the LLC Agreement as Common Stock and Preferred 
Stock.\8\
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    \8\ Interests in a Delaware LLC are referred to as limited 
liability company interests under the LLC Act rather than stock or 
shares. However, these interests can be referred to by whatever term 
the limited liability company agreement provides. The LLC Agreement 
defines such interests as Common Stock and Preferred Stock.
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    The proposed LLC Agreement begins with an introductory paragraph 
identifying the parties to the LLC Agreement and certain recitals. Such 
recitals set forth the conversion process generally, including (i) the 
applicable Delaware law \9\ by which the conversion is effected, (ii) 
the conversion of all of the shares of the capital stock of the NASDAQ 
OMX PHLX, Inc. into limited liability company interests of the LLC 
(designated therein as Common Stock and Preferred Stock), (iv) the 
admission of NASDAQ OMX Group and the PHLX Trust to the LLC as members 
thereof, and (v) the ownership structure post-conversion. As provided 
for in the LLC Agreement, NASDAQ OMX Group and the Trust will hold 
Common Stock and Preferred Stock, respectively, in the LLC, with the 
same rights and obligations as such entities had under the Certificate 
of Incorporation and the By-Laws immediately prior to the conversion. 
With respect to the other sections of the LLC Agreement, the changes 
from or additions to the existing organizational documents of the 
Exchange are discussed below by Section.
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    \9\ NASDAQ OMX PHLX would be converted pursuant to Section 18-
214 of the Delaware LLC Act (6 Del. C. Sec.  18-101, et seq.).
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    Section 1 of the LLC Agreement, titled ``Name; Conversion'', 
specifies the name of the entity in addition to other information with 
respect to the conversion process. As discussed above, the name of the 
Exchange, ``NASDAQ OMX PHLX, Inc.'', set forth in provision FIRST of 
the Certificate of Incorporation, is proposed to be changed to ``NASDAQ 
OMX PHLX LLC'' as required by the LLC Act. Section 1 of the LLC 
Agreement also notes that the organization documents, namely the 
Certificate of Formation and LLC Agreement with attachments, supersede 
the former organizational documents, in this case the Certificate of 
Incorporation

[[Page 54206]]

and the By-Laws of NASDAQ OMX PHLX, Inc. Further Section 1 of the LLC 
Agreement reiterates the conversion of all of the shares of the capital 
stock of the Exchange and the admission of the members of the LLC as 
generally set forth in the recitals of the LLC Agreement. The LLC Act 
provision which provides for the continued existence of the Exchange as 
a Delaware LLC is noted in the last sentence of this Section as well. 
This sentence, while not identical to, is similar in nature to the 
perpetual existence of the Exchange set forth in provision FIFTH of the 
Certificate of Incorporation in that it recognizes the continuation of 
the Exchange without a set term. This language was used in lieu of the 
language of provision FIFTH of the Certificate of Incorporation as it 
derives from the LLC Act and is more appropriate to the proposed new 
entity form of the Exchange. Identical language can be found in Section 
6 of the NSM LLC Agreement.
    Section 2 of the LLC Agreement, titled Principal Business Office, 
lists the principal business office of the Exchange and provides notice 
of such information to those reviewing the LLC Agreement. Such 
provision is standard in limited liability company agreements of 
Delaware LLCs \10\ and such addition will have no material substantive 
effect on the current operations or governance of the Exchange.
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    \10\ For example, see Section 2 of the NSM LLC Agreement.
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    Section 3 of the LLC Agreement, titled Registered Office; 
Registered Agent, lists the Exchange's registered office and registered 
agent, which was formerly reflected in provision SECOND of the 
Certificate of Incorporation. The entity acting as the registered agent 
and the place of the registered office will remain unchanged post-
conversion.
    Section 4 of the LLC Agreement, titled Members, sets out the name 
and mailing address of each Stockholder, providing notice of such 
information to those reviewing the LLC Agreement. Such provision is 
standard in limited liability company agreements of Delaware LLCs \11\ 
and such addition will have no material substantive effect on the 
current operations or governance of the Exchange.
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    \11\ For example, see Section 3 and 4 of the NSM LLC Agreement.
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    Section 5 of the LLC Agreement, titled Certificates, refers to the 
filing of Certificate of Formation and the Certificate of Conversion of 
the LLC. Such provision acknowledges and confirms that such filings, 
which were necessary for the conversion to be effected, were authorized 
by the LLC. This Section additionally sets forth those person(s) who 
have the authority to file any other certificates with the Delaware 
Secretary of State on behalf of the LLC pursuant to the LLC Act. This 
provision has no analog under the existing organizational documents of 
the Exchange but given its administrative nature, such change will have 
no material substantive effect on the current operations of the 
Exchange.
    Section 6 of the LLC Agreement, titled Purpose, discusses the 
Exchange's business purpose. This provision is virtually identical to 
provision THIRD of the Certificate of Incorporation with the following 
modifications: (i) This Section references a limited liability company 
instead of a corporation to reflect the appropriate entity form of the 
Exchange post-conversion, and (ii) this section also includes standard 
language to clarify that not only can the LLC engage in the general 
purpose set forth therein but it can also engage in those activities 
necessary or incidental to such purpose. This clarifying language is 
common in limited liability company agreements of Delaware LLCs \12\ 
and such addition will have no material substantive effect on the 
current operations or governance of the Exchange.
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    \12\ For example, see Section 7 of the NSM LLC Agreement.
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    Section 7 of the LLC Agreement, titled Powers, discusses the 
general powers of the Exchange, the Board of Governors and the Officers 
and largely defers to the applicable provisions set forth in the LLC 
By-Laws. The LLC By-Laws at Article IV, Section 4-4 delineate in more 
detail the powers of the Board of Governors which are referred to in 
Section 7 of the LLC Agreement. Similarly, the LLC By-Laws delineate in 
more detail the powers of the Officers of the Exchange in Article V. 
Article IV, Section 4-4 and Article V of the LLC By-Laws are identical 
to the corresponding provisions in the current By-Laws of the Exchange.
    Section 8 of the LLC Agreement, titled Management, sets forth the 
general management structure of the Exchange. It is proposed that the 
management structure of the LLC be the same as currently in effect 
under the governing documents of NASDAQ OMX PHLX, Inc. As proposed, the 
management would remain vested with the Board of Governors, the general 
powers, composition and removal of which are set forth in Section 8 of 
the LLC Agreement. Such provision is substantially identical to that of 
provision SIXTH of the Certificate of Incorporation.\13\ Certain 
additions have been made to the language retained from provision SIXTH 
of the Certificate of Incorporation, including (i) a provision 
referencing the applicable provisions of the By-Laws and their 
incorporation into the LLC Agreement in order to acknowledge the inter-
relationship of these two documents in the governance of the LLC, (iii) 
a sentence denoting each Governor as a ``manager'' of the LLC for 
purposes of the LLC Act,\14\ and (iv) a provision acknowledging that 
the Governors are agents of the LLC in performing their duties as 
prescribed by the Agreement. Each such addition represents standard 
language typically contained in limited liability company agreements of 
Delaware LLCs \15\ and such additions will have no material substantive 
effect on the current operations or governance of the Exchange.
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    \13\ The introductory paragraph of provision SIXTH of the 
Certificate of Incorporation is reflected in Section 8(a) and (b) of 
the LLC Agreement. Subsection (a) of provision SIXTH of the 
Certificate of Incorporation is reflected in Section 8(c) of the LLC 
Agreement. Subsection (b) of provision SIXTH of the Certificate of 
Incorporation is reflected in Section 8(f) of the LLC Agreement.
    \14\ As the term ``Governor'' is not a term used in the LLC Act, 
to ensure that provisions of the LLC Act that relate to ``managers'' 
of a Delaware LLC (i.e. those Persons who manage a Delaware LLC), 
the Governors have been denoted as such solely for this purpose.
    \15\ For example, see Section 9(a), (c) and (j) of the NSM LLC 
Agreement.
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    Section 9 of the LLC Agreement, titled Officers, discusses 
generally the officers of the LLC and their appointment, role as agent 
and duties but defaults to the By-Laws for a more detailed description 
of such topics. The applicable provisions of the LLC By-Laws are in 
Article V and remain identical to the description provided in Article V 
of the By-Laws currently in effect.
    Section 10 of the LLC Agreement, titled Limited Liability, 
corresponds, in part, with provision FIFTEENTH of the Certificate of 
Incorporation and Article IV, Section 4-18 of the current By-Laws in 
that it limits the personal liability of Governors for the debts and 
obligations of the Exchange. The Exchange also proposes to include, in 
Section 10 of the LLC Agreement, standard language, which is consistent 
with, and reflective of, the limitation on liability of members 
provided for in the LLC Act, to limit the personal liability of the 
Stockholders for the debts and obligations of the Exchange. Similar 
language is contained in the NSM LLC Agreement in Section 11 therein.
    Sections 11 through 14 of the LLC Agreement are equity-related 
provisions which encompass the topics of capital contributions, 
additional capital

[[Page 54207]]

contributions, allocations of profits and losses and distributions. 
These provisions set forth the basic economic arrangement of the 
Stockholders and remain consistent with the economic arrangement under 
the current corporate documents. For example, NASDAQ OMX Group, as the 
sole common shareholder, is generally entitled to all dividends 
declared by the Exchange. As the sole economic member of the LLC, 
NASDAQ OMX Group is entitled to all distributions made by the LLC. 
Profits and losses will also be allocated to NASDAQ OMX Group. This is 
a slight change from the current allocation structure, which allocates 
such profits and losses to the Exchange rather than directly to its 
stockholders. However, the LLC is a disregarded entity for tax purposes 
unlike a corporation, and as such profits and losses need to be 
allocated to the appropriate members of the LLC. The Trust does not 
share in such allocation as it has no economic rights associated with 
the Series A Preferred Stock it holds.\16\ Additionally, these Sections 
of the LLC Agreement require that NASDAQ OMX Group's contributions be 
noted in the books and records of the LLC and that no member shall be 
required to make any additional capital contribution to the LLC without 
its consent and the consent of the Board of Governors. These provisions 
are virtually identical to provisions 12 through 15 of the NSM LLC 
Agreement, and given their administrative nature shall have no material 
substantive effect on the operations of the Exchange. Section 14(b) 
also incorporates the language of Article FOURTEENTH of the Certificate 
of Incorporation, relating to distributions to foreign currency options 
participants, with certain modifications necessary in light of 
distribution limitations contained in the LLC Act. For example, the 
entire provision, which discusses certain distributions to foreign 
currency option participants, is ``subject to'' the LLC Act to ensure 
that the mandatory limitations on distributions contained in Sections 
18-607 and 18-804 of the LLC Act will be respected in contemplating any 
distribution under Section 14(b) of the LLC Agreement to the extent 
such provisions would be applicable to such distributions.
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    \16\ Currently, pursuant to the Certificate of Incorporation at 
provision FOURTH at (b), the Series A Preferred is entitled to no 
dividends and a de minimis amount in a liquidation preference. The 
Series A Preferred Shareholder retains these rights in the LLC 
Agreement at Section 16 (c)(iii).
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    The first sentence of Section 15 of the LLC Agreement, titled Books 
and Records, is reflective of Article TWELFTH of the Certificate of 
Incorporation. Section 15 of the LLC Agreement also sets forth certain 
additional information relating to general administrative matters with 
respect to the books and records of the LLC including that (i) the 
Board of Governors will keep and maintain complete books and records of 
the LLC, (ii) the Stockholders have the right to inspect such books and 
records, and (iii) the Board of Governors has the right to select 
method by which the books will be kept and the public accounting firm 
who will provide any independent audit of such books and records. Given 
the general administrative nature of such additions, none of these 
additions shall have any material substantive effect on the manner in 
which the Exchange is governed by the Board of Governors or the general 
operations of the Exchange.\17\
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    \17\ A virtually identical provision is set forth in Section 16 
of the NSM LLC Agreement.
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    Section 16 of the LLC Agreement, titled Limited Liability Company 
Interests, sets forth the classes of limited liability company 
interests, denoted as shares, of the LLC and the rights and obligations 
of each class. The language pertaining to the authorized shares, 
classes, rights and obligations of the Stockholders contained in this 
section is virtually identical to the language contained in provision 
FOURTH of the Certificate of Incorporation, which relates to the 
current shares and classes of the Exchange. There has been no material 
change to any of the rights and obligations of the Stockholders. A 
sentence has been added to allow for the Exchange to issue additional 
interests or securities in the Exchange upon approval by the Board of 
Governors.\18\ This gives the Exchange versatility in issuing the 
various ``interests'' to the members utilizing the Exchange, which are 
otherwise not contemplated generally in the LLC context. Any such 
``interests'' would be limited in the manner prescribed by the Board of 
Governors. Also, this Section includes language tracing the conversion 
of the corporate shares held by the Stockholders into shares of the 
LLC. Finally, the term ``dividend'' has been changed to 
``distribution'' as, under the LLC Act, a Delaware LLC makes 
distributions whereas a Delaware corporation would declare a dividend. 
This change does not affect the underlying right of the Stockholder to 
such property; it is merely a change in terminology. The information 
contained in Section 16 of the LLC Agreement is also set forth in 
Article XXIX, Section 29-4 of the LLC By-Laws. The definition for 
``Designated Independent Governors'' contained in provision FOURTH of 
the Certificate of Incorporation is not defined in Section 16, as the 
definition of this term is already set forth in in [sic] Article I of 
the By-Laws of the LLC. Such definition, other than updating the 
reference to the applicable governing documents, remains unchanged 
post-conversion.
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    \18\ Specifically, the last sentence of Section 16(a) of the LLC 
Agreement would state: ``The Exchange may issue or establish such 
other interests in the Exchange or such other Exchange securities as 
the Board determines in accordance with this Agreement and the By-
Laws.'' With respect to this proposed sentence, the Exchange notes 
that if it decided to issue or establish such other interests in the 
Exchange or other Exchange securities, the Exchange would take the 
necessary corporate actions and would seek the necessary approvals 
to do so. See E-mail from Angela S. Dunn, Assistant General Counsel, 
Phlx, to Richard Holley, Assistant Director, Division of Trading and 
Markets, Commission, dated August 25, 2010.
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    Section 17 of the LLC Agreement, titled Other Business, is standard 
language in the limited liability company context and merely states 
that the Stockholders may engage in other business other than their 
interest in the LLC and that the LLC has no rights to such other 
business or the proceeds derived therefrom. This concept is consistent 
with that of a stockholder of a corporation in that a stockholder, 
generally, has no obligation to present opportunities to the 
corporation or turn over proceeds derived from other ventures of the 
stockholder. A similar provision is contained in Section 18 of the NSM 
LLC Agreement.
    Section 18 of the LLC Agreement, titled Exculpation and 
Indemnification, provides for the exculpation and the indemnification 
of the Stockholders and related persons. The inclusion of such a 
provision in the limited liability context is not uncommon as it 
reflects the fact that Stockholders, under the LLC Act, can act on 
behalf of the LLC to the extent authorized under the LLC Agreement and 
the LLC By-Laws. As such, it is proposed to provide the same level of 
exculpation and indemnification for such persons as is given to the 
Board of Governors to the extent such persons are authorized to act on 
behalf of the LLC. As such, the same standard of conduct applicable to 
the Board of Governors under Article SIXTEENTH of the Certificate of 
Incorporation is proposed to be used in Section 18 of the LLC 
Agreement. Articles FIFTEENTH and SIXTEENTH of the Certificate of 
Incorporation, relating to the exculpation and indemnification of the 
Board of Governors, have been set forth in Article IV, Sections 4-18(g) 
and 4-18(h) of the LLC By-Laws.
    Section 19 of the LLC Agreement is merely a general statement that 
any

[[Page 54208]]

transfer of an interest in the LLC must be made in accordance with the 
By-Laws and the LLC Agreement. The LLC Agreement addresses transfers in 
Section 16 thereof. Such section provides certain conditions to the 
transfer of the outstanding Common Stock and Preferred Stock and, as 
noted previously, such conditions are virtually identical to those 
conditions currently contained in provision FOURTH of the Certificate 
of Incorporation. Additionally, Article XXIX, Section 29-4 of the LLC 
By-Laws also addresses the transfer of shares in the Exchange. With 
minor modifications addressing limited liability company specific 
issues, Article XXIX, Section 29-4 of the LLC By-Laws remains identical 
to Article XXIX, Section 29-4 of the By-Laws currently in effect.\19\
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    \19\ Section 20 of the LLC Agreement is intentionally omitted 
and may be used at a future date. The Exchange would file a proposed 
rule change with the Commission if it intended to amend this 
provision.
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    Section 21 of the LLC Agreement sets forth the events which will 
cause the dissolution of the LLC, as prescribed by mandatory provisions 
of the LLC Act or as otherwise agreed among the parties. A similar 
provision is contained in Section 21 of the NSM LLC Agreement.
    Sections 22 through 26 and 28 of the LLC Agreement are general 
provisions which are relatively standard in limited liability company 
agreements of Delaware LLCs.\20\ These provisions include: A benefits 
of agreement clause, a severability clause, a binding agreement clause, 
an entire agreement clause, a governing law clause and a notice 
provision. We note that the Trustee, Members and Member Organizations 
are acknowledged as holding rights under the Agreement and included as 
third-party beneficiaries to the LLC Agreement as is similarly provided 
in the NSM LLC Agreement.
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    \20\ For example, see Sections 22 through 26, and 28 of the NSM 
LLC Agreement.
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    Section 27 of the LLC Agreement contains the necessary vote under 
which the LLC Agreement may be amended. Under the Certificate of 
Incorporation, the Board of Governors had the right to amend the By-
Laws currently in effect. Such By-Laws provide for amendment in the 
manner prescribed in Article XXII, Section 22-1. This same amendment 
vote has been set forth in Section 27 of the LLC Agreement so that the 
authority of the Board of Governors to amend will remain unchanged 
following the conversion.
    The provisions in the Certificate of Incorporation have been 
incorporated into the Certificate of Formation, LLC Agreement and By-
Laws as indicated herein but for provisions FIFTH and TENTH. The 
language used in provision FIFTH of the Certificate of Incorporation 
was not incorporated verbatim into the LLC Agreement; however, as noted 
previously, the general concept of this provision is reflected in the 
last sentence of Section 5 of the LLC Agreement. Additionally, 
provision TENTH of the Certificate of Incorporation was not carried 
over to the proposed Agreement because such provision is not consistent 
with applicable Delaware law in the limited liability company context.
III. Proposed By-Laws of the LLC
    As noted above, the Exchange proposes to adopt the By-Laws of 
NASDAQ OMX PHLX, Inc. as the LLC By-Laws with the changes noted below.
    It is proposed to incorporate certain global changes to the By-Laws 
currently in effect including (i) referencing the Certificate of 
Formation of the LLC, the LLC By-Laws and/or the LLC Agreement, as 
applicable, instead of the Certificate of Incorporation as such 
documents will replace and supersede the Certificate of Incorporation 
and existing By-Laws, (ii) deleting references to the DGCL (including 
the definition thereof) throughout the By-Laws as such law will no 
longer be applicable to the Exchange post-conversion and substituting 
in lieu thereof the phrase ``applicable law,'' and (iii) updating all 
references to ``NASDAQ OMX PHLX, Inc.'' to ``NASDAQ OMX PHLX LLC'' 
consistent with the name change associated with the conversion.
    Specifically, in Article I, titled Definitions, the Exchange 
proposes to delete the reference to Section 1-1 Definitions. The 
Exchange proposes to reference the LLC By-Laws, the LLC Agreement and 
the Trust Agreement in the definition for both Designated Governors and 
Designated Independent Governor, in lieu of the reference to provision 
FOURTH of the Certificate of Incorporation, which will no longer be 
effective post-conversion. None of these changes will have a material 
substantive effect but are merely reflective of the proposed change in 
applicable governing documents.
    Further, the Exchange proposes to include in the text associated 
with the term ``Member'' a sentence that such term as used in the LLC 
By-Laws is distinct from the usage of member within the meaning of the 
LLC Agreement and the LLC Act.\21\ Again this change has no material 
substantive effect but merely reflects that the term ``member'' is a 
term of art under the LLC Act, with rights and obligations associated 
with it that are distinct from how the term ``Member'' is used in the 
LLC By-Laws. The Exchange also proposes to amend the text in the term 
``Demutualized [sic] Merger'' to be historically accurate in that 
NASDAQ OMX PHLX, Inc. was a party to such transaction rather than the 
LLC, which was not in existence on the date of such merger.
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    \21\ The meaning of ``Member'' as set forth in the LLC By-Laws 
is not proposed to change.
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    The term ``Stockholder'' is proposed to be modified to reflect that 
NASDAQ OMX Group and the Trust are no longer stockholders of a 
corporation but members of a Delaware LLC. Such change does not have 
material substantive effect but is merely a conforming change to the 
new entity form of the Exchange. The rights and obligations of these 
persons remain unchanged following the conversion, only the terminology 
is proposed to be revised. Such definition is consistent with the 
meaning given to such term in the LLC Agreement.
    The Exchange proposes to define ``NASDAQ OMX Conversion'' to refer 
to the conversion proposed and described herein from the Delaware 
corporation, ``NASDAQ OMX PHLX, Inc.'' to the Delaware LLC, ``NASDAQ 
OMX PHLX LLC.'' The Exchange proposes to eliminate references to the 
Merger Subsidiary \22\ and replace those references with language 
referencing the conversion to an LLC.
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    \22\ This language was added to the By-Laws at the time of the 
merger between a wholly owned subsidiary of NASDAQ OMX Group and the 
Philadelphia Stock Exchange, Inc. See Securities Exchange Act 
Release Nos. 58179 (July 17, 2008), 73 FR 42874 (July 23, 2008) (SR-
Phlx-2008-31); and 58183 (July 17, 2008), 73 FR 42850 (July 23, 
2008) (SR-NASDAQ-2008-035).
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    The Exchange proposes to amend Article III, titled Member and 
Member Organization Nominations--Member and Member Organization Annual 
Elections--Member and Member Organization Meetings, to remove 
references to the Certificate of Incorporation and instead reference 
the By-Laws, as the By-Laws, following the conversion, will be the 
appropriate governing document.
    Section 3-3 of Article III, titled Removal of Designated Governors, 
is proposed to refer to a special meeting in the first sentence thereof 
in lieu of the current reference to an annual meeting. The reference to 
an ``annual'' meeting is inconsistent with the remainder of the first 
sentence in Section 3-3. Such sentence discusses a meeting called in 
accordance with Section 3-2(e). Section 3-2(e) sets forth the procedure 
to call a

[[Page 54209]]

``special'' meeting not an ``annual'' meeting. As such, the correct 
meeting reference is to a ``special'' meeting not an ``annual'' 
meeting. The Exchange proposes to make this change so that the sentence 
is consistent throughout. This proposal does not amend the composition 
of the Board of Governors.
    The Exchange proposes to amend Article IV, titled Board of 
Governors, to remove references to the Merger and Merger Subsidiary and 
instead reference the Conversion. Section 4-18 of Article IV of the LLC 
By-Laws, titled Indemnification, is proposed to reflect the relevant 
indemnification standard provided in provision FIFTEENTH of the 
Certificate of Incorporation pertaining to the indemnification of 
Governors. It is proposed to include in Section 4-21 of Article IV of 
the LLC By-Laws clarifying language regarding the necessary purpose 
behind a books and records inspection request. Such language is 
consistent with and provided by the LLC Act.
    The Exchange proposes to add a Section 4-24 to Article IV of the 
LLC By-Laws. This provision, entitled ``Interested Transactions'' is 
substantially identical to the language used in provision ELEVENTH of 
the Certificate of Incorporation and ensures that the guidelines 
relating to the types of transactions described therein are retained 
following the conversion of the Exchange.
    The Exchange proposes to remove the reference to ``corporate'' in 
each instance where the phrase ``corporate seal'' is used in Article V 
of the current By-Laws, specifically Section 5-8. The term 
``corporate'' is not applicable to the Exchange post-conversion.
    The Exchange proposes certain changes to Article VIII, titled 
Presiding Officials of the Exchange, Article X, titled Standing 
Committees, Article XII, titled Permits-Eligibility-Election-Initiation 
Fee, Article XV, titled Transfer of Foreign Currency Options 
Participations, Article XVII, titled Insolvency-Suspension-
Reinstatement, and Article XVIII, titled Offenses, Discipline, 
Penalties and Business Connections [sic], to add clarifying language, 
correct minor inconsistencies and remove extraneous language within 
these sections. These changes have no material substantive effect on 
the above noted provisions or the operations of the Exchange but are 
merely clerical in nature.
    The Exchange proposes to make certain clerical changes to Article 
XV, titled Transfer of Foreign Currency Options Participations. These 
changes are not substantive in nature and merely reflect a 
reorganization of the existing provisions. Specifically, the terms 
ordering Section 15-3 (e.g. ``First'') have been deleted as such terms 
are redundant in light of the phrase ``in the following order of 
seniority'' contained in Section 15-3(a). Additionally, the sub-
sections of Section 15-3(a)(iii) have been given a letter ordering 
designation. Finally, the sub-section of Section 15-3 entitled 
``Balance of Proceeds'' has been moved to follow the last paragraph 
relating to the priority of payments in order to have such sub-section 
be in the appropriate payment priority. Such sub-section was not 
otherwise modified.
    The Exchange proposes to incorporate additional language to the 
transfer provision contained in Article XXIX, Section 29-4(b) to 
address Delaware LLC-specific issues. The existing conditions to 
transfers previously set forth in Section 29-4(b) remain unchanged. 
Rather, the additional language in the first sentence of Section 29-
4(b) merely adds a new requirement to the effectiveness of a transfer. 
Under the proposed Section 29-4(b), a written instrument in which the 
transferee agrees to be bound by the LLC Agreement must be delivered 
along with the other instruments noted in Section 29-4(b) prior to a 
transfer being effective. This will ensure that any transferee is aware 
of, and bound by, all relevant governing provisions. Additionally, two 
sentences have been added to this subsection in order to address the 
admission of any transferee who complies with this Section to the LLC. 
Unlike a stockholder in the corporation, a transferee needs to be 
admitted to the LLC before it can obtain the rights of a member 
thereof. This is an additional formality in the limited liability 
company context that needs to be provided for; however, the provision 
for admission contained in Section 29-4(b) does not effect a material 
substantive change on the transfer provision as a whole but is merely 
reflective of a nuance specific to the limited liability company form. 
To the extent that a transferee complies with Section 29-4, the 
additional language provides that they will automatically be admitted 
to the LLC.
IV. Other Provisions of the Certificate of Incorporation
    There are two other Articles of the Certificate of Incorporation of 
NASDAQ OMX PHLX, Inc. which are reflected in the By-Laws of the 
Exchange. Article SEVENTH is set forth in By-Law Article XXVIII, 
Section 28-13 and titled Action Without a Meeting. Also, Article EIGHTH 
of the Certificate of Incorporation is set forth in By-Law Article 
XXVIII, Section 28-1 and titled Place of Stockholder Meetings. The LLC 
Agreement and attached By-Laws provide the Board the ability to amend 
documents as set forth in By-Law Article XXII, Section 22-1, Amendments 
to By-Laws as well as Section 27 of the LLC Agreement.
    The Exchange intends for this proposal to be operative upon filing 
with the State of Delaware.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \23\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \24\ in particular, in that it is designed 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, by streamlining all subsidiary self-regulatory organizations 
of NASDAQ OMX Group to conform the corporate documents and provide 
clarity to its members. The proposed amendments will not impact the 
rights of members or the sole shareholder, both of which will continue 
to be entitled to all rights and privileges that exist under the 
governing documents of NASDAQ OMX PHLX, Inc.\25\
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    \23\ 15 U.S.C. 78f(b).
    \24\ 15 U.S.C. 78f(b)(5).
    \25\ ``The conversion of any entity into a domestic limited 
liability company shall not be deemed to affect any obligations or 
liabilities of the other entity prior to its conversion to a 
domestic limited liability company * * *'' See 6 Del. C. Sec.  18-
214(e).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act.

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

    No written comments were either solicited or received.

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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days after the date of the filing, or such 
shorter time as the Commission may designate, it has become effective 
pursuant to

[[Page 54210]]

19(b)(3)(A)(ii) of the Act \26\ and Rule 19b-4(f)(6) \27\ thereunder.
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    \26\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \27\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
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    A proposed rule change filed under Rule 19b-4(f)(6) \28\ normally 
does not become operative prior to 30 days after the date of the 
filing. However, pursuant to Rule 19b-4(f)(6)(iii),\29\ the Commission 
may designate a shorter time if such action is consistent with the 
protection of investors and the public interest. The Exchange has asked 
the Commission to waive the 30-day operative delay so that the proposal 
may become operative immediately upon filing. The Commission believes 
that waiving the 30-day operative delay is consistent with the 
protection of investors and the public interest.\30\ The Exchange 
represents that the proposal ``does not impact either the members of 
NASDAQ OMX PHLX, Inc. or the public'' and only ``impacts the 
administrative functions of the Exchange.'' \31\ Additionally, the 
Commission notes that the Exchange represents that the proposed 
Certificate of Formation, LLC Agreement, and By-Laws reflect all of the 
current rights and obligations of the members and owners of the 
Exchange, and that the proposed LLC Agreement is consistent in form and 
scope with the limited liability company agreement of another self-
regulatory organization previously approved by the Commission.\32\ 
Accordingly, the Commission waives the 30-day operative delay 
requirement and designates the proposed rule change to be operative on 
September 1, 2010.
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    \28\ 17 CFR 240.19b-4(f)(6).
    \29\ 17 CFR 240.19b-4(f)(6)(iii).
    \30\ For purposes only of waiving the 30-day operative delay, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \31\ See SR-PHLX-2010-104 at Item 7.
    \32\ See supra note 4 and accompanying text, and discussion in 
Section II.A.1.
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that 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.

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-Phlx-2010-104 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-Phlx-2010-104. 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 Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street, NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. 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 File Number SR-Phlx-2010-104 and should be 
submitted on or before September 24, 2010.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\33\
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    \33\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-22023 Filed 9-2-10; 8:45 am]
BILLING CODE 8011-01-P