Document ID: SEC-2005-0475-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: National Association of Securities Dealers, Inc.
Posted Date: 2005-12-30T05:00Z

[Federal Register: December 30, 2005 (Volume 70, Number 250)]
[Notices]               
[Page 77433-77435]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr30de05-100]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53022; File No. SR-NASD-2005-145]

 
Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change and Amendment No. 1 Thereto Relating to a Certificate of 
Designation for Preferred Stock of The Nasdaq Stock Market, Inc.

December 23, 2005.
    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 December 8, 2005, the National Association of Securities Dealers, 
Inc. (``NASD''), through its subsidiary, The Nasdaq Stock Market, Inc. 
(``Nasdaq'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by Nasdaq. Nasdaq filed 
Amendment No. 1 to the proposed rule change on December 21, 2005.\3\ 
Nasdaq has designated this proposal as a ``non-controversial'' proposed 
rule change pursuant to section 19(b)(3)(A)(iii) of the Act \4\ and 
Rule 19b-4(f)(6) thereunder,\5\ which renders the proposal effective 
upon filing with the Commission. The Commission is publishing this 
notice to solicit comments on the proposed rule change, as amended, 
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 modified the basis for summary 
effectiveness of the filing from Rule 19b-4(f)(3) under the Act to 
Rule 19b-4(f)(6), which pertains to non-controversial rule changes.
    \4\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \5\ 17 CFR 240.19b-4(f)(6).

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[[Page 77434]]

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

    Nasdaq proposes to adopt a Certificate of Designation, Preferences 
and Rights (a ``Certificate of Designation'') of Series D Preferred 
Stock (``Series D Preferred''). Nasdaq will implement the proposed rule 
change as soon as practicable.\6\
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    \6\ The Commission notes that on December 14, 2005, Nasdaq filed 
a certificate of designation for the Series D Preferred with the 
Secretary of the State of Delaware. On December 20, 2005, Nasdaq and 
NASD entered into an exchange agreement pursuant to which NASD 
exchanged one share of Nasdaq's Series B Preferred Stock for one 
newly issued Series D Preferred. See Nasdaq's Form 8-K, dated 
December 20, 2005.
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    The text of the proposed rule change is available on Nasdaq's 
Internet Web site (http://www.nasdaq.com), at NASD's principal office, 

and at the Commission's Public Reference Room.

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

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

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

1. Purpose
    Nasdaq is filing the Certificate of Designation described below. 
Under Article Fourth of Nasdaq's Restated Certificate of Incorporation, 
Nasdaq's Board of Directors may authorize the issuance of preferred 
stock and fix its designation, powers, preferences and rights, as well 
as any qualifications, limitations, and restrictions upon it. Under 
Delaware law, the Certificate of Designation is deemed to be an 
amendment to Nasdaq's Restated Certificate of Incorporation, and as 
such, Nasdaq is filing the Certificate of Designation with the 
Commission.
    In 2002, Nasdaq fixed the designation, powers, preferences, and 
rights for its Series B Preferred Stock (``Series B Preferred'') and 
issued a single share of the Series B Preferred to its parent 
corporation, the NASD.\7\ The Series B Preferred holder votes, together 
as one class with Nasdaq's common stock, on all matters submitted to a 
vote of holders of common stock. The Series B Preferred has variable 
voting rights such that the number of votes entitled to be cast by the 
holder of the Series B Preferred equals that number of votes that, 
together with votes otherwise entitled to be cast by the holder of the 
Series B Preferred Stock at a meeting, whether by virtue of share 
ownership, proxies, voting trust arrangements or otherwise, entitle the 
holder to exercise one vote more than one-half of all votes entitled to 
be cast. Thus, by virtue of its ownership of the Series B share, NASD 
controls Nasdaq, and would continue to control Nasdaq without regard to 
its level of ownership of Nasdaq common stock.
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    \7\ See Securities Exchange Act Release No. 45638 (March 25, 
2002), 67 FR 15268 (March 29, 2002).
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    Nasdaq currently derives its regulatory authority from NASD's 
registration as a national securities association. Nasdaq exercises its 
authority by virtue of a delegation from the NASD under the terms of 
the Commission-approved Plan of Allocation and Delegation of Functions 
by NASD to Subsidiaries (the ``Delegation Plan''), but the Series B 
Preferred provides a means by which the NASD may assure that Nasdaq 
operates in accordance with the Delegation Plan. The Series B Preferred 
provides, however, that it loses its voting rights and will be redeemed 
by Nasdaq upon Nasdaq ``becoming registered with the U.S. Securities 
and Exchange Commission as a national securities exchange,'' because 
Nasdaq would no longer be required to operate under the Delegation Plan 
if it was authorized by the Commission to operate as an exchange.
    In 2000 and 2001, Nasdaq filed an application to register as a 
national securities exchange. Earlier this year, Nasdaq filed 
substantial amendments to its exchange registration application, under 
which Nasdaq would become a holding company and a newly formed 
subsidiary, The NASDAQ Stock Market LLC (``NASDAQ LLC''), would become 
registered as a national securities exchange. Nasdaq is optimistic that 
its amended exchange registration application will be approved in the 
near future. However, it is likely that NASDAQ LLC would not operate as 
an exchange until some date after the issuance of an order approving 
its exchange registration application. Accordingly, in the event of the 
issuance of such an approval order, it is likely that Nasdaq would 
still need to continue to operate pursuant to the Delegation Plan until 
such time as NASDAQ LLC begins to operate as an exchange (the 
``Operational Date''). During this transitional period, NASD would need 
to continue to exercise control with respect to Nasdaq. The terms of 
the Series B Preferred, however, are not well suited to possible 
scenarios under which exchange registration may be implemented, such as 
in this case, exchange registration would occur in advance of the 
Operational Date, and NASDAQ LLC, rather than Nasdaq, would be the 
entity registered as an exchange.\8\
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    \8\ Earlier this year, Nasdaq stockholders approved an amendment 
to the Series B Preferred that would result in the termination of 
voting rights upon the registration of Nasdaq or a subsidiary 
thereof as an exchange. The amendment, however, did not address 
ambiguity occasioned by a delay in time between the approval of 
Nasdaq's exchange registration and the Operational Date.
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    Accordingly, Nasdaq proposes to adopt the Certificate of 
Designation and issue one share of Series D Preferred to the NASD in 
exchange for the cancellation of the outstanding share of Series B 
Preferred. The terms and conditions of the Series D Preferred are 
identical in all respects to those of the Series B Preferred, except 
that the triggering event for a loss of voting rights and redemption of 
the Series D Preferred would be ``the first date on which [Nasdaq] and 
all subsidiaries thereof are no longer operating in any respect 
pursuant to authority delegated by'' NASD under the Delegation Plan. 
Thus, if exchange registration is granted to NASDAQ LLC, the Series D 
Preferred would lose its voting rights on the Operational Date.\9\ NASD 
has also filed a proposal that would remove Nasdaq from the Delegation 
Plan,\10\ and Nasdaq expects that if the proposal is approved by the 
Commission, it will be implemented on the Operational Date.
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    \9\ In the unlikely event that there is a transitional period 
during which NASDAQ LLC operates as an exchange for certain stocks 
while Nasdaq continues to operate as a facility of the NASD for 
other stocks, the Series D Preferred would remain until Nasdaq had 
ceased to operate in that capacity.
    \10\ See Securities Exchange Act Release No. 52049 (July 15, 
2005), 70 FR 42398 (July 22, 2005).
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2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of section 15A of the Act,\11\ in general, and with 
sections 15A(b)(2) and (b)(6) of the Act,\12\ in particular, which 
require, among other things, that the NASD be so organized and have the 
capacity to be able to carry out the purposes of the Act and to comply 
with and enforce compliance with the provisions of the Act, and the 
NASD's rules are designed to prevent fraudulent and manipulative acts 
and practices, to promote just and equitable principles of

[[Page 77435]]

trade, and, in general, to protect investors and the public interest. 
The issuance of the Series D Preferred will ensure that NASD continues 
to control Nasdaq until NASDAQ LLC operates as an exchange and Nasdaq 
is no longer operating pursuant to the Delegation Plan.
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    \11\ 15 U.S.C. 78o-3.
    \12\ 15 U.S.C. 78o-3(b)(2) and (b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

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

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

    Written comments were neither solicited nor received.

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

    The Exchange has designated the proposed rule change, as amended, 
as a ``non-controversial'' rule change pursuant to section 
19(b)(3)(A)(iii) of the Act \13\ and subparagraph (f)(6) of Rule 19b-4 
thereunder.\14\ Nasdaq represents that the foregoing rule change: does 
not (i) significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
by its terms, does not become operative for 30-days after the date of 
this filing, or such shorter time as the Commission may designate if 
consistent with the protection of investors and the public interest. 
Nasdaq has requested that the Commission waive the five-day pre-filing 
requirement and the 30-day operative delay period for ``non-
controversial'' proposals and make the proposed rule change, as 
amended, effective and operative upon filing.
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    \13\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \14\ 17 CFR 240.19b-4(f)(6).
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    The Commission has determined to waive the five-day pre-filing 
requirement and the 30-day operative delay period.\15\ The Commission 
notes that accelerating the operative date will allow Nasdaq to 
exchange the Series B Preferred for the Series D share with NASD. 
Therefore, the foregoing rule change has become immediately effective 
and operative upon filing pursuant to section 19(b)(3)(A)(iii) of the 
Act \16\ and Rule 19b-4(f)(6) thereunder.\17\
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    \15\ For purposes only of accelerating the operative date of 
this proposal, the Commission has considered the proposed rule's 
impact on efficiency, competition, and capital formation. 15 U.S.C. 
78c(f).
    \16\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \17\ 17 CFR 240.19b-4(f)(6).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate 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, 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 No. SR-NASD-2005-145 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-9303.
    All submissions should refer to File Number SR-NASD-2005-145. 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 Commissions 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 the 
filing also will be available for inspection and copying at the 
principal office of NASD. 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-NASD-2005-145 and should be submitted on or before January 20, 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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Jonathan G. Katz,
Secretary.
[FR Doc. E5-8128 Filed 12-29-05; 8:45 am]

BILLING CODE 8010-01-P