Document ID: SEC-2006-0558-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: NASDAQ Stock Market LLC
Posted Date: 2006-04-28T04:00Z

[Federal Register: April 28, 2006 (Volume 71, Number 82)]
[Notices]               
[Page 25265-25271]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr28ap06-120]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53697; File No. SR-NASDAQ-2006-006]

 
Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing of Proposed Rule Change and Amendment No. 1 Thereto 
Regarding Restrictions on Affiliation Between Nasdaq and Its Members

April 21, 2006.
    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 April 5, 2006, The NASDAQ Stock Market LLC (``Nasdaq''), filed with 
the Securities and Exchange Commission (``Commission'' or ``SEC'') the 
proposed rule change as described in Items I, II, and III below, which 
Items have been prepared by Nasdaq. On April 12, 2006, Nasdaq filed 
Amendment No. 1 to the proposed rule change.\3\ 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.
    \3\ In Amendment No. 1, Nasdaq proposed additional revisions to 
Nasdaq Rule 9270 regarding settlement procedures.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Nasdaq proposes to establish a rule to govern affiliations between 
Nasdaq and its members and to make conforming changes to its 
disciplinary proceedings. Nasdaq will implement the proposed rule 
change immediately upon approval by the Commission.
    The text of the proposed rule change is below. Proposed new 
language is in italics; proposed deletions are in brackets.

[[Page 25266]]

2140. Restrictions on Affiliation

    (a) Except as provided in paragraph (b):
    (1) Nasdaq or any entity with which it is affiliated shall not, 
directly or indirectly, acquire or maintain an ownership interest in, 
or engage in a business venture with, a Nasdaq member or an affiliate 
of a Nasdaq member in the absence of an effective filing under Section 
19(b) of the Act; and
    (2) A Nasdaq member shall not be or become an affiliate of Nasdaq, 
or an affiliate of an entity affiliated with Nasdaq, in the absence of 
an effective filing under Section 19(b) of the Act.
    The term ``affiliate'' shall have the meaning specified in Rule 
12b-2 under the Act; provided, however, that for purposes of this Rule, 
one entity shall not be deemed to be an affiliate of another entity 
solely by reason of having a common director. The term ``business 
venture'' means an arrangement under which (A) Nasdaq or an entity with 
which it is affiliated, and (B) a Nasdaq member or an affiliate of a 
Nasdaq member, engage in joint activities with an expectation of shared 
profit and a risk of shared loss from common entrepreneurial efforts.
    (b) Nothing in this rule shall prohibit, or require a filing under 
Section 19(b) of the Act, for:
    (1) A Nasdaq member or an affiliate of a Nasdaq member acquiring or 
holding an equity interest in The Nasdaq Stock Market, Inc. that is 
permitted by the ownership limitations contained in Nasdaq Rule 2130, 
or
    (2) Nasdaq or an entity affiliated with Nasdaq acquiring or 
maintaining an ownership interest in, or engaging in a business venture 
with, an affiliate of a Nasdaq member if:
    (A) there are information barriers between the member and Nasdaq 
and its facilities, such that the member
    (i) Will not be provided an informational advantage concerning the 
operation of Nasdaq and its facilities, and will not be provided 
changes or improvements to the trading system that are not available to 
the industry generally or other Nasdaq members;
    (ii) Will not have any knowledge in advance of other Nasdaq members 
of proposed changes, modifications, or improvements to the operations 
or trading systems of Nasdaq and its facilities, including advance 
knowledge of Nasdaq filings pursuant to Section 19(b) of the Act;
    (iii) Will be notified of any proposed changes, modifications, or 
improvements to the operations or trading systems of Nasdaq and its 
facilities in the same manner as other Nasdaq members are notified; and
    (iv) Will not share employees, office space, or databases with 
Nasdaq or its facilities, The Nasdaq Stock Market, Inc., or any entity 
that is controlled by The Nasdaq Stock Market, Inc.; and
    (B) Nasdaq's Regulatory Oversight Committee certifies, on an annual 
basis, to the Director of the Division of Market Regulation that Nasdaq 
has taken all reasonable steps to implement the requirements of this 
rule and is in compliance therewith.
* * * * *
9268. Decision of Hearing Panel or Extended Hearing Panel
    (a)-(d) No change.
    (e) Appeal or Review.
    (1) If not timely appealed pursuant to Rule 9311 or timely called 
for review pursuant to Rule 9312, the majority decision shall 
constitute final disciplinary action of Nasdaq for purposes of SEC Rule 
19d-1(c)(1).
    (2) The majority decision with respect to a Nasdaq member that is 
an affiliate of Nasdaq within the meaning of Rule 2140 shall constitute 
final disciplinary action of Nasdaq for purposes of SEC Rule 19d-
1(c)(1) and may not be appealed pursuant to Rule 9311 or called for 
review pursuant to Rule 9312.
9269. Default Decisions
    (a)-(c) No change.
    (d) Final Disciplinary Action of Nasdaq; Effectiveness of 
Sanctions.
    (1) If a default decision is not appealed pursuant to Rule 9311 or 
called for review pursuant to Rule 9312 within 25 days after the date 
the Office of Hearing Officers serves it on the Parties, the default 
decision shall become the final disciplinary action of Nasdaq for 
purposes of SEC Rule 19d-1(c)(1). Unless otherwise provided in the 
default decision, the sanctions shall become effective on a date to be 
determined by Nasdaq Regulation staff, except that a bar or expulsion 
shall become effective immediately upon the default decision becoming 
the final disciplinary action of Nasdaq. The decision shall be served 
on a Respondent by courier, facsimile or other means reasonably likely 
to obtain prompt service when the sanction is a bar or an expulsion.
    (2) A default decision with respect to a Nasdaq member that is an 
affiliate of Nasdaq within the meaning of Rule 2140 shall constitute 
final disciplinary action of Nasdaq for purposes of SEC Rule 19d-
1(c)(1) and may not be appealed pursuant to Rule 9311 or called for 
review pursuant to Rule 9312.
9270. Settlement Procedure
    (a)-(d) No change.
    (e) If a Respondent makes an offer of settlement and the Department 
of Enforcement or the Department of Market Regulation does not oppose 
it, the offer of settlement is uncontested. If an offer of settlement 
is determined to be uncontested by the Department of Enforcement or the 
Department of Market Regulation before a hearing on the merits has 
begun, the Department of Enforcement or the Department of Market 
Regulation shall transmit the uncontested offer of settlement and a 
proposed order of acceptance to the Nasdaq Review Council (or to the 
Office of Disciplinary Affairs, in the case of a Respondent that is an 
affiliate of Nasdaq within the meaning of Rule 2140) with its 
recommendation. If an offer of settlement is determined to be 
uncontested by the Department of Enforcement or the Department of 
Market Regulation after a hearing on the merits has begun, the 
Department of Enforcement or the Department of Market Regulation shall 
transmit the offer of settlement and a proposed order of acceptance to 
the Hearing Panel or, if applicable, the Extended Hearing Panel for 
acceptance or rejection. If accepted by the Hearing Panel or, if 
applicable, Extended Hearing Panel, the offer of settlement and the 
order of acceptance shall be forwarded to the Nasdaq Review Council (or 
to the Office of Disciplinary Affairs, in the case of a Respondent that 
is an affiliate of Nasdaq within the meaning of Rule 2140) to accept or 
reject.
    (1) No change.
    (2) Before an offer of settlement and an order of acceptance shall 
become effective, they shall be submitted to and accepted by the Nasdaq 
Review Council or the Office of Disciplinary Affairs. The Review 
Subcommittee [or the Office of Disciplinary Affairs] may accept or 
reject such offer of settlement and order of acceptance or refer them 
to the Nasdaq Review Council for acceptance or rejection by the Nasdaq 
Review Council. [The Review Subcommittee may reject such offer of 
settlement and order of acceptance or refer them to the Nasdaq Review 
Council for acceptance or rejection by the Nasdaq Review Council.] In 
the case of a Respondent that is an affiliate of Nasdaq within the 
meaning of Rule 2140, the offer of settlement and order of acceptance 
shall be accepted or rejected by the Office of Disciplinary Affairs and 
shall not be referred to the Nasdaq Review Council.
    (3) No change.
    (f) Contested Offers of Settlement.

[[Page 25267]]

    If a Respondent makes an offer of settlement and the Department of 
Enforcement or the Department of Market Regulation opposes it, the 
offer of settlement is contested. When the Department of Enforcement or 
the Department of Market Regulation opposes an offer of settlement, the 
Respondent's written offer and the Department of Enforcement's or the 
Department of Market Regulation's written opposition shall be submitted 
to a Hearing Panel or, if applicable, an Extended Hearing Panel. The 
Hearing Panel or, if applicable, the Extended Hearing Panel, may order 
the Department of Enforcement or the Department of Market Regulation 
and the Respondent to attend a settlement conference.
    (1) If a contested offer of settlement is approved by the Hearing 
Panel or, if applicable, Extended Hearing Panel, the Hearing Officer 
shall draft an order of acceptance of the offer of settlement. The 
order of acceptance shall make findings of fact, including a statement 
of the rule, regulation, or statutory provision violated, and impose 
sanctions consistent with the terms of the offer of settlement. The 
offer of settlement, any written opposition thereto, and the order of 
acceptance shall be forwarded to the Nasdaq Review Council (or to the 
Office of Disciplinary Affairs, in the case of a Respondent that is an 
affiliate of Nasdaq within the meaning of Rule 2140) to accept or 
reject.
    (2) Before an offer of settlement and order of acceptance shall 
become effective, they shall be submitted to, and accepted by, the 
Nasdaq Review Council or the Office of Disciplinary Affairs. The Review 
Subcommittee may accept or reject such offer of settlement and order of 
acceptance or refer them to the Nasdaq Review Council for acceptance or 
rejection by the Nasdaq Review Council. In the case of a Respondent 
that is an affiliate of Nasdaq within the meaning of Rule 2140, the 
offer of settlement and order of acceptance shall be accepted or 
rejected by the Office of Disciplinary Affairs and shall not be 
referred to the Nasdaq Review Council.
    (3) If the offer of settlement and order of acceptance are accepted 
by the Office of Disciplinary Affairs, the Nasdaq Review Council or the 
Review Subcommittee, the Chief Regulatory Officer shall issue the order 
and notify the Office of Hearing Officers.
    (g) No change.
    (h) Rejection of Offer of Settlement.
    If an uncontested offer of settlement or an order of acceptance is 
rejected by the Hearing Panel or, if applicable, the Extended Hearing 
Panel, the Review Subcommittee, the Office of Disciplinary Affairs, or 
the Nasdaq Review Council, the Respondent shall be notified in writing 
and the offer of settlement and proposed order of acceptance shall be 
deemed withdrawn. If a contested offer of settlement or an order of 
acceptance is rejected by the Hearing Panel or, if applicable, the 
Extended Hearing Panel, the Review Subcommittee, the Office of 
Disciplinary Affairs, or the Nasdaq Review Council, the Respondent 
shall be notified in writing and the offer of settlement and proposed 
order of acceptance shall be deemed withdrawn. The rejected offer and 
proposed order of acceptance shall not constitute a part of the record 
in any proceeding against the Respondent making the offer.
    (i) No change.
    (j) No Prejudice from Rejected Offer of Settlement.
    If an offer of settlement is rejected by a Hearing Panel or, if 
applicable, an Extended Hearing Panel, the Review Subcommittee, the 
Office of Disciplinary Affairs, or the Nasdaq Review Council, the 
Respondent shall not be prejudiced by the offer, which may not be 
introduced into evidence in connection with the determination of the 
issues involved in the pending complaint or in any other proceeding.
* * * * *
9311. Appeal by Any Party; Cross-Appeal
    (a) Time to File Notice of Appeal.
    A Respondent or the Department of Enforcement or the Department of 
Market Regulation may file a written notice of appeal within 25 days 
after service of a decision issued pursuant to Rule 9268 or Rule 9269; 
provided, however, that a decision with respect to a Respondent that is 
an affiliate of Nasdaq within the meaning of Rule 2140 may not be 
appealed to the Nasdaq Review Council.
    (b)-(f) No change.
9312. Review Proceeding Initiated by Nasdaq Review Council
    (a) Call for Review.
    (1) Rule 9268 Decision.
    A decision issued pursuant to Rule 9268 may be subject to a call 
for review by any member of the Nasdaq Review Council or, pursuant to 
authority delegated from the Nasdaq Review Council, by any member of 
the Review Subcommittee. A decision issued pursuant to Rule 9268 shall 
be subject to a call for review within 45 days after the date of 
service of the decision. If called for review, such decision shall be 
reviewed by the Nasdaq Review Council.
    (2) Rule 9269 Decision.
    A default decision issued pursuant to Rule 9269 shall be subject to 
a call for review by the Chief Regulatory Officer, on his or her own 
motion within 25 days after the date of service of the decision. If 
called for review, such decision shall be reviewed by the Nasdaq Review 
Council.
    (3) Decision Regarding Affiliate of Nasdaq.
    Notwithstanding anything herein to the contrary, a decision with 
respect to a member that is an affiliate of Nasdaq within the meaning 
of Rule 2140 may not be called for review by the Nasdaq Review Council.
    (b)-(d) No change.
* * * * *
9351. Discretionary Review by Nasdaq Board
    (a) Call for Review by Director.
    A Director may call a disciplinary proceeding for review by the 
Nasdaq Board if the call for review is made within the period 
prescribed in paragraph (b); provided, however, that a decision with 
respect to a member that is an affiliate of Nasdaq within the meaning 
of Rule 2140 may not be called for review.
    (b)-(e) No change.
9360. Effectiveness of Sanctions
    Unless otherwise provided in the decision issued under Rule 9349 or 
Rule 9351, a sanction (other than a bar, an expulsion, or a permanent 
cease and desist order) specified in a decision constituting final 
disciplinary action of Nasdaq for purposes of SEC Rule 19d-1(c)(1) 
shall become effective on a date to be determined by Nasdaq staff (or 
the Hearing Panel, Extended Hearing Panel, or Office of Disciplinary 
Affairs in the case of a decision with respect to an affiliate of 
Nasdaq within the meaning of Rule 2140). A bar, an expulsion, or a 
permanent cease and desist order shall become effective upon service of 
the decision constituting final disciplinary action of Nasdaq, unless 
otherwise specified therein. Nasdaq shall serve the decision on a 
Respondent by courier, facsimile or other means reasonably likely to 
obtain prompt service when the sanction is a bar, an expulsion, or a 
permanent cease and desist order.
* * * * *
9523. Acceptance of Member Regulation Recommendations and Supervisory 
Plans by Consent Pursuant to SEC Rule 19h-1
    (a)-(b) No change.
    (c) If the disqualified member, sponsoring member, and/or 
disqualified person execute the letter consenting to

[[Page 25268]]

the supervisory plan, it shall be submitted to Nasdaq Regulation by the 
Department of Member Regulation with a proposed Notice under SEC Rule 
19h-1, where required. Nasdaq Regulation shall forward the supervisory 
plan and proposed Notice under SEC Rule 19h-1, if any, to the Chairman 
of the Statutory Disqualification Committee, acting on behalf of the 
Nasdaq Review Council (or to the Office of Disciplinary Affairs in the 
case of a supervisory plan with respect an affiliate of Nasdaq within 
the meaning of Rule 2140). The Chairman of the Statutory 
Disqualification Committee may accept or reject the recommendation of 
the Department of Member Regulation and the supervisory plan or refer 
them to the Nasdaq Review Council for acceptance or rejection by the 
Nasdaq Review Council, and the Office of Disciplinary Affairs may 
accept or reject the recommendation of the Department of Member 
Regulation and the supervisory plan.
    (d) If the recommendation and supervisory plan is accepted by the 
Nasdaq Review Council, [or] the Chairman of the Statutory 
Disqualification Committee, or the Office of Disciplinary Affairs, it 
shall be deemed final and, where required, the proposed Notice under 
SEC Rule 19h-1 will be filed by Nasdaq. If the recommendation and 
supervisory plan are rejected by the Chairman of the Statutory 
Disqualification Committee, [or] the Nasdaq Review Council, or the 
Office of Disciplinary Affairs, Nasdaq Regulation may take any other 
appropriate action with respect to the disqualified member, sponsoring 
member, and/or disqualified person. If the recommendation and 
supervisory plan are rejected, the disqualified member, sponsoring 
member, and/or disqualified person shall not be prejudiced by the 
execution of the letter consenting to the supervisory plan under 
subparagraph (a) and the letter may not be introduced into evidence in 
any proceeding.
9524. Nasdaq Review Council Consideration
    (a) Hearing Panel Consideration.
    (1) Appointment of Hearing Panel.
    When the disqualified member, sponsoring firm, or applicant 
requests a hearing, the Nasdaq Review Council or the Review 
Subcommittee shall appoint a Hearing Panel composed of two or more 
members, who shall be current or former members of the Nasdaq Review 
Council or the Statutory Disqualification Committee or former Directors 
(provided, however, that current members of the Nasdaq Review Council 
shall not serve on a Hearing Panel with respect to an affiliate of 
Nasdaq within the meaning of Rule 2140). The Hearing Panel shall 
conduct a hearing and recommend a decision on the request for relief.
    (2)-(9) No change.
    (10) Recommendation.
    On the basis of the record, the Hearing Panel shall present a 
recommended decision in writing on the request for relief to the 
Statutory Disqualification Committee. After considering the record and 
recommendation of the Hearing Panel, the Statutory Disqualification 
Committee shall present its recommended decision in writing to the 
Nasdaq Review Council. Notwithstanding the foregoing, with respect to a 
Nasdaq member that is an affiliate of Nasdaq within the meaning of Rule 
2140, the Hearing Panel shall prepare a final decision meeting the 
requirements of Rule 9524(b)(2), which shall not be reviewed by the 
Statutory Disqualification Committee or the Nasdaq Review Council, and 
may not be called for review by the Nasdaq Board pursuant to Rule 9525.
    (b) Decision.
    (1)-(2) No change.
    (3) Issuance of Decision After Expiration of Call for Review 
Period.
    The Nasdaq Review Council shall provide its proposed written 
decision to the Nasdaq Board. The Nasdaq Board may call the eligibility 
proceeding for review pursuant to Rule 9525. If the Nasdaq Board does 
not call the eligibility proceeding for review, the proposed written 
decision of the Nasdaq Review Council shall become final, and the 
Nasdaq Review Council shall serve its written decision on the 
disqualified member, sponsoring member, and/or disqualified person, as 
the case may be, and the Department of Member Regulation pursuant to 
Rules 9132 and 9134. In the case of a decision with respect to a Nasdaq 
member that is an affiliate of Nasdaq within the meaning of Rule 2140, 
the decision of the Hearing Panel shall become final without being 
provided to the Nasdaq Board, and the Hearing Panel shall serve its 
written decision.
    The decision shall constitute final action of Nasdaq, unless the 
Nasdaq Review Council remands the eligibility proceeding. A decision to 
deny re-entry or continued association shall be effective immediately. 
A decision to approve shall be effective after the Commission issues an 
acknowledgment letter or, in cases involving Commission ordered 
sanctions, an order.
* * * * *
9559. Hearing Procedures for Expedited Proceedings Under the Rule 9550 
Series
    (a)-(p) No change.
    (q) Call for Review by the Nasdaq Review Council.
    (1) The Nasdaq Review Council's Review Subcommittee may call for 
review a decision issued under the Rule 9550 Series within 21 days 
after receipt of the decision from the Office of Hearing Officers; 
provided, however, that a decision under the Rule 9550 Series with 
respect to a Nasdaq member that is an affiliate of Nasdaq within the 
meaning of Rule 2140 shall constitute final disciplinary action of 
Nasdaq for purposes of SEC Rule 19d-1(c)(1) and may not be called for 
review pursuant to Rule 9559. Rule 9313(a) is incorporated by 
reference.
* * * * *

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

    In its filing with the Commission, Nasdaq included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it had received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. Nasdaq has prepared summaries, set forth in Sections A, 
B, and C below, of the most significant aspects of such statements.

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

1. Purpose
    In connection with its registration as a national securities 
exchange,\4\ Nasdaq has agreed to propose a rule to regulate 
affiliation between Nasdaq and its members, and to limit in certain 
respects Nasdaq's regulatory authority with respect to members with 
which it may become affiliated. The purpose of the rule is to guard 
against any possibility that Nasdaq may exercise, or forebear to 
exercise, regulatory authority with respect to an affiliated member in 
a manner that is influenced by commercial considerations, to provide an 
opportunity for Commission review of certain proposed affiliations, and 
to ensure that certain affiliated members do not receive advantaged 
access to information in comparison with unaffiliated members. Nasdaq 
believes

[[Page 25269]]

that the proposed rule will provide added assurance of regulatory 
integrity without subjecting Nasdaq and its affiliates to unwarranted 
restrictions on their commercial activities.
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    \4\ Securities Exchange Act Release No. 53128 (January 13, 
2006), 71 FR 3550 (January 23, 2006) (File No. 10-131).
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    In general, the proposed rule provides that Nasdaq must file a 
proposed rule change with the SEC before Nasdaq or an entity with which 
it is affiliated acquires or maintains an ownership interest in, or 
engages in a business venture with, a Nasdaq member or an affiliate of 
a Nasdaq member.\5\ The rule defines ``affiliate'' with reference to 
Rule 12b-2 under the Act,\6\ which provides that if one person 
controls, is controlled by, or is under common control another person, 
the persons are affiliates. The proposed rule would help to implement 
what Nasdaq perceives to be emerging Commission policy with regard to 
appropriate activities for member broker-dealers that are affiliated 
with self-regulatory organizations (``SROs''). For example, although 
the Commission's order to establish the Archipelago Exchange 
(``ArcaEx'') as a facility of the Pacific Exchange (``PCX'') allowed 
ArcaEx to affiliate itself with various broker-dealers for the purpose 
of introducing orders to ArcaEx and routing them to other trading 
venues,\7\ the Commission's order with respect to the acquisition of 
PCX by Archipelago Holdings (``Arca Holdings'') mandated that Arca 
Holdings divest its ownership of PCX members engaged in activities 
other than outbound routing.\8\
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    \5\ As used in the rule, the term ``affiliate'' includes natural 
persons, but the term ``entity,'' when used to describe an 
affiliate, excludes natural persons.
    \6\ 17 CFR 240.12b-2.
    \7\ Securities Exchange Act Release No. 44983 (October 25, 
2001), 66 FR 55225 (November 1, 2001) (SR-PCX-00-25).
    \8\ Securities Exchange Act Release No. 52497 (September 22, 
2005), 70 FR 56949 (September 29, 2005) (SR-PCX-2005-90).
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    Nasdaq's proposed rule would make it clear that in a case where 
Nasdaq proposes an acquisition of, or a merger or business venture with 
a Nasdaq member, an SEC filing will be required. In order to make it 
clear that the obligation to avoid affiliations that have not been 
filed is imposed by the rule both on Nasdaq and its members, moreover, 
the rule provides that a Nasdaq member shall not be or become an 
affiliate of Nasdaq, or an affiliate of any entity affiliated with 
Nasdaq, without an SEC filing.
    The term ``business venture,'' as used in the rule, is defined as 
an arrangement under which Nasdaq or an entity with which it is 
affiliated, on the one hand, and a Nasdaq member or affiliate thereof, 
on the other hand, engage in joint activities with an expectation of 
shared profit and a risk of shared loss from common entrepreneurial 
efforts. Thus, the term does not include, and the proposed rule does 
not regulate, contracts with members or their affiliates to provide 
goods, products, or services for consideration, including, but not 
limited to, asset or stock purchase agreements that do not result in 
ongoing ties with a member or its affiliates,\9\ credit or debt 
facilities, licenses of intellectual property, contracts for investment 
banking, financial advisory, or consulting services,\10\ or the 
provision of transaction services or data to a broker-dealer member or 
products or services to a listed company that is or that owns a member 
broker-dealer.
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    \9\ For example, if Nasdaq acquired a non-member subsidiary of a 
member in a transaction that did not result in an ongoing 
affiliation with the member, the transaction would not be regulated 
by the rule.
    \10\ In some cases, such contracts may involve sharing of 
confidential information with a member in circumstances where a 
member acts as a fiduciary for Nasdaq or one of its affiliates. The 
member would be required take measures to prevent such information 
from being misused, and a failure to do so would constitute a 
violation of Nasdaq rules, including, depending on the 
circumstances, Rule 2110 (Standards of Commercial Honor and 
Principles of Trade); Rule 2120 (Use of Manipulative, Deceptive, or 
Other Fraudulent Devices); and Rule 3010 (Supervision). See also 
NASD Notice to Members 91-45: NASD/NYSE Joint Memo on Chinese Wall 
Policies and Procedures (June 21, 1991) (describing NASD policies 
with regard to preventing misuse of confidential information by NASD 
member firms).
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    The rule limits possible expansive interpretations of the term 
``affiliate'' by stipulating that one entity is not deemed to be an 
affiliate of another entity solely by virtue of having a common 
director. For example, if one of the member representative directors of 
Nasdaq elected by the Nasdaq membership is also a director of a Nasdaq 
member, that member would not be deemed to be an affiliate of Nasdaq 
solely because of the common director. In addition, the rule should not 
be construed to regulate in any manner the selection of directors or 
standing committee members of Nasdaq, The Nasdaq Stock Market, Inc. 
(``Nasdaq Holdco''), or their affiliates, provided such selections are 
conducted in accordance with applicable provisions of governing 
corporate documents (e.g., Nasdaq's limited liability company agreement 
and by-laws or Nasdaq Holdco's certificate of incorporation and 
bylaws).
    In circumstances where an SEC filing is required, the rule may, in 
appropriate cases, permit a filing to be submitted on an immediately 
effective basis under Section 19(b)(3)(A) of the Act \11\ and Rule 19b-
4(f) thereunder.\12\ For example, in cases where a proposed affiliation 
or business venture would not result in the establishment of a 
``facility'' of Nasdaq within the meaning of Section 3 of the Act,\13\ 
a filing to establish rules to govern the operation of the affiliate or 
business venture would not be required or appropriate. Rather, in such 
circumstances, Nasdaq would expect to engage in informal consultation 
with the Division of Market Regulation and/or members of the 
Commission, and would then submit a filing to amend Rule 2140 itself, 
to establish that the affiliation or business venture could exist as an 
exception to the rule. Depending on the circumstances, such a filing 
might be submitted on an immediately effective basis.
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    \11\ 15 U.S.C. 78s(b)(3)(A).
    \12\ 17 CFR 240.19b-4(f).
    \13\ 15 U.S.C. 78c.
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    There are also several important exceptions to the general filing 
requirement of the rule. First, the rule would not require a filing for 
transactions that result in a Nasdaq member acquiring or holding an 
interest in Nasdaq Holdco that is consistent with Nasdaq Rule 2130. 
Rule 2130 provides that ``[n]o member or person associated with a 
member shall be the beneficial owner of greater than twenty percent 
(20%) of the then-outstanding voting securities of The Nasdaq Stock 
Market, Inc.'' ``Beneficial ownership'' is defined with reference to 
Nasdaq Holdco's certificate of incorporation, which in turn provides 
that a person shall be deemed the ``beneficial owner'' of, shall be 
deemed to have ``beneficial ownership'' of and shall be deemed to 
``beneficially own'' any securities: (i) Which such person or any of 
such person's affiliates is deemed to beneficially own, directly or 
indirectly, within the meaning of Rule 13d-3 under the Act * * *; \14\ 
(ii) subject to certain narrow exceptions described in the certificate 
of incorporation, which such person or any of such person's affiliates 
has the right to acquire or to vote pursuant to any agreement, 
arrangement, or understanding; or (iii) subject to certain narrow 
exceptions described in the certificate of incorporation, which are 
beneficially owned, directly or indirectly, by any other person and 
with respect to which such person or any of such person's affiliates 
has any agreement, arrangement or understanding for the purpose of 
acquiring, holding, voting or disposing of such securities. Thus,

[[Page 25270]]

although a person may be construed to have an ownership interest in the 
Nasdaq Holdco under a range of circumstances, a member's ownership 
interest would be permissible under Rule 2130 and would not require an 
SEC filing pursuant to Rule 2140 as long as the total ownership 
interest of the member constituted 20% or less of the then outstanding 
voting securities of Nasdaq. For example, one of Nasdaq's current 
investors, Silver Lake Partners, is affiliated with Instinet, LLC 
(``Instinet''), a registered broker-dealer. If Instinet becomes a 
Nasdaq member, the rule would not be construed to restrict its 
activities in any respect as long as (i) the ownership interest of 
Nasdaq Holdco imputed to it remains under 20%, and (ii) its affiliation 
with Nasdaq arises from its ownership interest. Nasdaq would, however, 
be required to submit a filing if Nasdaq itself acquired an ownership 
interest in Instinet or entered into a business venture with it (unless 
another exception to Rule 2140 applied). Similarly, the rule would not 
require a filing with respect to an acquisition of a Nasdaq member by a 
Nasdaq Holdco stockholder, as long as the Nasdaq member's resulting 
beneficial ownership interest in Nasdaq Holdco was under 20%.
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    \14\ SEC Rule 13d-3, 17 CFR 240.13d-3, in turn provides that a 
beneficial owner of a security includes any person who, directly or 
indirectly, through any contract, arrangement, understanding, 
relationship, or otherwise has or shares voting power or investment 
power.
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    Finally, the rule provides that no filing is required for Nasdaq or 
an entity affiliated with Nasdaq acquiring or maintaining an ownership 
interest in, or engaging in a business venture with, an affiliate of a 
Nasdaq member if there are information barriers between the member and 
Nasdaq and its facilities, such that the member (i) will not be 
provided an informational advantage concerning the operation of Nasdaq 
and its facilities, and will not be provided changes or improvements to 
the trading system that are not available to the industry generally or 
other Nasdaq members; (ii) will not have knowledge in advance of other 
members of proposed changes, modifications, or improvements to the 
operations or trading systems of Nasdaq and its facilities, including 
advance knowledge of Nasdaq filings pursuant to Section 19(b) of the 
Act; (iii) will be notified of any proposed changes, modifications, or 
improvements to the operations or trading systems of Nasdaq and its 
facilities in the same manner as other Nasdaq members are notified; and 
(iv) will not share employees, office space, or databases with Nasdaq 
or its facilities, Nasdaq Holdco, or any entity that is controlled by 
Nasdaq Holdco.\15\ Nasdaq's Regulatory Oversight Committee must 
certify, on an annual basis, to the Director of the Division of Market 
Regulation that Nasdaq has taken all reasonable steps to implement the 
foregoing requirements with respect to any affiliate to which they 
apply and is in compliance therewith.
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    \15\ Nasdaq will not construe these limitations to bar an 
employee of an affiliated member from serving on a Nasdaq advisory 
committee, such as the Quality of Markets Committee, since (i) such 
committee members are required to sign confidentiality agreements 
with regard to information received through committee service, and 
(ii) the committee member employed by the affiliate would receive 
information provided through committee service at the same time as 
other committee members.
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    This exception is aimed at circumstances in which Nasdaq or an 
affiliated entity acquires, or enters into a business venture with, an 
affiliate of a Nasdaq member, and Nasdaq erects information barriers 
between the member and Nasdaq and its facilities. Thus, Nasdaq ensures 
that the member does not receive any advantage as a result of its 
affiliation.
    The proposed rule change also modifies Nasdaq's rules regarding 
disciplinary proceedings to provide that Nasdaq disciplinary actions 
with regard to a member that is an affiliate of Nasdaq (including 
litigated and default decisions, contested and uncontested settlements, 
statutory disqualification proceedings, and expedited proceedings) may 
not be appealed to the Nasdaq Review Council or called for review by 
the Nasdaq Review Council or the Nasdaq Board of Directors. Rather, 
after an initial decision with regard to such members is reached by the 
NASD under the terms of Nasdaq's regulatory services agreement with 
NASD, the member could appeal directly to the Commission. These changes 
to the disciplinary process would apply to all affiliated members, 
including members whose affiliations did not require a filing pursuant 
to Rule 2140.
2. Statutory Basis
    Nasdaq believes that the proposed rule change, as amended, is 
consistent with the provisions of Section 6 of the Act,\16\ in general, 
and with Section 6(b)(5) of the Act,\17\ in particular, in that it is 
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 regulating, clearing, 
settling, processing information with respect to, and facilitating 
transactions in securities, 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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    \16\ 15 U.S.C. 78f.
    \17\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

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

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

    Written comments were neither solicited nor received.

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

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

IV. Solicitation of Comments

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

Electronic Comments

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

File Number SR-NASDAQ-2006-006 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NASDAQ-2006-006. 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

[[Page 25271]]

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 Nasdaq. All comments 
received will be posted without change; the Commission does not edit 
personal identifying information from submissions. You should submit 
only information that you wish to make publicly available. All 
submissions should refer to File Number SR-NASDAQ-2006-006 and should 
be submitted on or before May 19, 2006.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
 [FR Doc. E6-6376 Filed 4-27-06; 8:45 am]

BILLING CODE 8010-01-P