Document ID: SEC-2011-0415-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX PHLX LLC
Posted Date: 2011-03-30T04:00Z

[Federal Register Volume 76, Number 61 (Wednesday, March 30, 2011)]
[Notices]
[Pages 17730-17733]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-7415]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-64122; File No. SR-Phlx-2011-03]

Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of 
Filing and Order Granting Accelerated Approval of a Proposed Rule 
Amendment to Rule 862 Relating to Discretionary Proxy Voting on 
Executive Compensation Matters

March 24, 2011.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on March 16, 2011, NASDAQ OMX PHLX LLC (``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 and is approving the proposed rule change on an 
accelerated basis.
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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, pursuant to Section 19(b)(1) of the Act \3\ and Rule 
19b-4 thereunder,\4\ proposes to amend Phlx Rule 862 (Proxies at 
Direction of Owner) to prohibit member organizations from voting on 
matters related to executive compensation, or any other significant 
matter, as determined by the Securities and Exchange Commission 
(``Commission'') by rule unless instructed by the beneficial owner of 
the shares.
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    \3\ 15 U.S.C. 78s(b)(1).
    \4\ 17 CFR 240.19b-4.
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    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, and at the Commission's Public 
Reference Room.

[[Page 17731]]

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 III 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
    Exchange Rule 862 provides instructions on how the proxies are 
voted. A member organization may give a proxy to vote stock provided 
that:
    (1) It has transmitted proxy-soliciting material to the beneficial 
owner of stock;
    (2) It has not received voting instructions from the beneficial 
owner by the date specified in the statement accompanying such 
material; and
    (3) Provided such action is adequately disclosed to stockholders 
and does not include authorization for a merger, consolidation or any 
matter which may substantially affect the rights or privileges of such 
stock.

The purpose of the proposed rule change is to amend Exchange Rule 
862(2)(b) to prohibit member organizations from voting on matters 
related to executive compensation, or any other significant matter, as 
determined by the Commission, unless instructed by the beneficial owner 
of the shares. On July 21, 2010, the President signed the Dodd-Frank 
Wall Street Reform and Consumer Protection Act (the ``Dodd-Frank 
Act''). Section 957 of the Dodd-Frank Act adopted new Section 6(b)(10) 
of the Act.\5\ This new provision requires all national securities 
exchanges to adopt rules that prohibit their members from voting on the 
election of a member of the board of directors of an issuer (except for 
a vote with respect to the uncontested election of a member of the 
board of directors of any investment company registered under the 
Investment Company Act of 1940), executive compensation, or any other 
significant matter, as determined by the Commission, unless the member 
receives voting instructions from the beneficial owner of the shares.
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    \5\ 15 U.S.C. 78f(b)(10).
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    On August 18, 2010, the Exchange filed amendments to Rule 862 to, 
in part, eliminate broker discretionary voting for all elections of 
directors at shareholder meetings, whether contested or not, except for 
companies registered under the Investment Company Act of 1940 (the 
``1940 Act''), provided that it is not the subject of counter 
solicitation.\6\
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    \6\ See Securities Exchange Act Release No. 62775 (August 26, 
2010), 75 FR 53725 (September 1, 2010)(SR-Phlx-2010-115).
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    To further assure compliance with the newly adopted Section 
6(b)(10), the Exchange proposes to add a new Item 21 and accompanying 
commentary to Exchange Rule 862(2)(b) to provide that in no event could 
a member organization vote shares on matters regarding executive 
compensation, or any other significant matter, as determined by the 
Commission, unless instructed by the beneficial owner of the shares. 
The proposed commentary to Item 21 would clarify that a matter relating 
to executive compensation would include, among other things, the items 
referred to in Section 14A of the Exchange Act (added by Section 951 of 
the Dodd-Frank Act), including (i) an advisory vote to approve the 
compensation of executives, (ii) a vote on whether to hold such an 
advisory vote every one, two or three years, and (iii) an advisory vote 
to approve any type of compensation (whether present, deferred, or 
contingent) that is based on or otherwise relates to an acquisition, 
merger, consolidation, sale, or other disposition of all or 
substantially all of the assets of an issuer and the aggregate total of 
all such compensation that may (and the conditions upon which it may) 
be paid or become payable to or on behalf of the executive officer. In 
addition, a member organization may not give or authorize a proxy to 
vote without instructions on a matter relating to executive 
compensation, even if such matter would otherwise qualify for an 
exception from the requirements of Item 12, Item 13 or any other Item 
under Exchange Rule 862(2)(b). Any vote on these or similar executive 
compensation-related matters would be subject to the requirements of 
Exchange Rule 862.
    The Exchange's proposal also includes commentaries to Items 12 and 
13 to provide guidance that a member organization may not give or 
authorize a proxy to vote without instructions on a matter relating to 
executive compensation, even if such matter would otherwise qualify for 
an exception from the requirements of Item 12, Item 13 or any other 
Item under Rule 862, and further provides a reference to Item 21.
    The Exchange is proposing to add the words ``or authorize'' in the 
following places to clarify that the rule includes not only the giving 
of a proxy but the authorization of such proxy:
    1. Exchange Rule 862(2)(b); and
    2. Exchange Rule 862(2)(b)(20).
    The Exchange also made necessary clerical changes in the following 
manner:
    1. Item 19 deletes the colon and the word ``or'' at the end of the 
paragraph, and adds a semi-colon; and
    2. Item 20 deletes a period at the end of the paragraph, and adds a 
semi-colon and the word ``or''.
    Similar changes have already been made at the New York Stock 
Exchange, Inc. (``NYSE'') and The Nasdaq Stock Market LLC 
(``NASDAQ'').\7\ Amending Exchange Rule 862 similarly continues to 
provide consistency among the exchanges to eliminate disparities 
regarding proxy voting, as well as complies with Section 6(b)(10) of 
the Act.\8\
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    \7\ See NYSE Rule 452, Securities Exchange Act Release No. 34-
62874 (September 9, 2010), 75 FR 56152 (September 15, 2010) (SR-
NYSE-2010-59); and NASDAQ Rule 2251, Securities Exchange Act Release 
No. 34-62992 (September 24, 2010), 75 FR 60844 (October 1, 2010) 
(SR-NASDAQ-2010-114).
    \8\ 15 U.S.C. 78f(b)(10).
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the provisions of Section 6 of the Act,\9\ in general and with 
Section 6(b)(10) of the Act,\10\ in particular. Section 6(b)(10) 
requires that a national securities exchange's rules must prohibit any 
member that is not the beneficial owner of a security registered under 
Section 12 from granting a proxy to vote the security in connection 
with a shareholder vote on, among other things, executive compensation 
matters, or any other significant matter, as determined by the 
Commission. The proposed rule change will adopt the prohibition 
required by Section 6(b)(10).
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    \9\ 15 U.S.C. 78f.
    \10\ 15 U.S.C. 78f(b)(10).
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    Section 6(b)(5) requires that the rules of a national securities 
exchange be designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to foster 
cooperation and coordination with persons engaged in facilitating 
transactions in securities, and to remove impediments to and perfect 
the mechanism of a free and open market and a national market

[[Page 17732]]

system, and, in general, to protect investors and the public interest. 
The proposed rule change is consistent with this requirement in that it 
will protect investors and the public interest by adopting the 
requirements of Section 957 of the Dodd-Frank Act.

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. 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-2011-03 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-Phlx-2011-03. 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 Phlx. 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 publicly available. All 
submissions should refer to File Number SR-Phlx-2011-03 and should be 
submitted on or before April 20, 2011.

IV. Commission's Findings and Order Granting Accelerated Approval of 
the Proposed Rule Change

    In its filing, the Exchange requested that the Commission approve 
the proposal on an accelerated basis. The Exchange stated that it 
believed good cause existed to grant accelerated approval because 
Section 957 of the Dodd-Frank Act does not provide for a transition 
period.
    After careful consideration, the Commission finds that the proposed 
rule change is consistent with the requirements of the Act and the 
rules and regulations thereunder applicable to a national securities 
exchange.\11\ The Commission believes that the proposal is consistent 
with Section 6(b)(10) \12\ of the Act, which requires that national 
securities exchanges adopt rules prohibiting members that are not 
beneficial holders of a security from voting uninstructed proxies with 
respect to the election of a member of the board of directors of an 
issuer (except for uncontested elections of directors for companies 
registered under the Investment Company Act), executive compensation, 
or any other significant matter, as determined by the Commission, by 
rule. The Commission also believes that the proposal is consistent with 
Section 6(b)(5) \13\ of the Act, which provides, among other things, 
that the rules of the Exchange must be designed to promote just and 
equitable principles of trade, 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, and are not 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \11\ In approving this rule change, the Commission notes that it 
has considered the proposed rule's impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f).
    \12\ 15 U.S.C. 78f(b)(10).
    \13\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that the proposal is consistent with 
Section 6(b)(10) of the Act because it adopts revisions that comply 
with that section. As noted in the accompanying Senate Report, Section 
957, which adopts Section 6(b)(10), reflects the principle that ``final 
vote tallies should reflect the wishes of the beneficial owners of the 
stock and not be affected by the wishes of the broker that holds the 
shares.'' \14\ The proposed rule change will make Phlx rules compliant 
with the new requirements of Section 6(b)(10) by prohibiting broker-
dealers, who are not beneficial owners of a security, from voting 
uninstructed shares with respect to any matter on executive 
compensation or any other significant matter, as determined by the 
Commission by rule.\15\
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    \14\ See S. Rep. No. 111-176, at 136 (2010).
    \15\ As noted above, Section 6(b)(10) also prohibits broker 
voting for director elections, except for uncontested director 
elections of registered investment companies. PHLX already prohibits 
broker voting in director elections except for uncontested director 
elections for registered investment companies. See Phlx Rule 
862(2)(b)(19) and note 6 supra; see also note 16 infra. As to other 
matters, the Commission has not, to date, adopted rules concerning 
other significant matters where uninstructed broker votes should be 
prohibited, although it may do so in the future. Should the 
Commission adopt such rules, we would expect PHLX to adopt 
coordinating rules promptly to comply with the statute.
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    The Commission believes that the proposal is consistent with 
Section 6(b)(5) of the Act because the proposal will further investor 
protection and the public interest by assuring that shareholder votes 
on executive compensation matters are made by those with an economic 
interest in the company, rather than by a broker that has no such 
economic interest, which should enhance corporate governance and 
accountability to shareholders.\16\
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    \16\ As the Commission stated in approving NYSE rules 
prohibiting broker voting in the election of directors, having those 
with an economic interest in the company vote the shares, rather 
than the broker who has no such economic interest, furthers the goal 
of enfranchising shareholders. See Securities Exchange Act Release 
No. 60215 (July 1, 2009), 74 FR 33293 (July 10, 2009) (SR-NYSE-2006-
92).
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    The Commission notes that Phlx's new rule prohibiting uninstructed 
broker votes on executive compensation covers the specific items 
identified in Section 951 of the Dodd-Frank Act, as well as any other 
matter concerning executive compensation, and has been drafted broadly 
to reflect the requirements of Section 6(b)(10) of the Act. The 
proposed rule language also specifically states that a broker vote on 
any executive compensation matter would not be permitted even it would

[[Page 17733]]

otherwise qualify for an exception from any item under Rule 862. The 
Commission believes this provision will make clear that any past 
practice or interpretation that may have permitted a broker vote on an 
executive compensation matter, under existing rules, will no longer be 
applicable and is superseded by the newly adopted provisions.
    Finally, the Commission notes that the change to reflect that Phlx 
rules prohibit not only the giving of a proxy, but also the 
authorization of the proxy, should help to clarify the intent of Phlx 
proxy rules and is consistent with the requirements of Section 6 of the 
Act.
    Based on the above, the Commission believes that the Phlx's 
proposal will further the purposes of Sections 6(b)(5) and 6(b)(10) of 
the Act by ensuring that brokers, holding shares on behalf of 
beneficial owners, are not voting uninstructed shares on matters 
relating to executive compensation, which should enhance corporate 
accountability to shareholders. The rule filing should also serve to 
fulfill the Congressional intent in adopting Section 6(b)(10) of the 
Act.
    The Commission also finds good cause, pursuant to Section 19(b)(2) 
of the Act,\17\ for approving the proposed rule change prior to the 
30th day after the date of publication of notice in the Federal 
Register. As noted above, Section 6(b)(10) of the Act, enacted under 
Section 957 of the Dodd-Frank Act, does not provide for a transition 
phase, and requires rules of national securities exchanges to prohibit, 
among other things, broker voting on executive compensation. The 
Commission believes that good cause exists to grant accelerated 
approval to the Exchange's proposal, because it will conform Phlx Rule 
862 to the requirements of Section 6(b)(10) of the Act. Moreover, the 
Commission notes that the proposed changes are based on NYSE Rule 
452.\18\
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    \17\ 15 U.S.C. 78s(b)(2).
    \18\ See supra note 7
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\19\ that the proposed rule change (SR-Phlx-2011-03) be, and it 
hereby is, approved on an accelerated basis.
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    \19\ 15 U.S.C. 78s(b)(2).
    \20\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-7415 Filed 3-29-11; 8:45 am]
BILLING CODE 8011-01-P