Document ID: SEC-2006-0574-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: National Stock Exchange
Posted Date: 2006-05-03T04:00Z

[Federal Register: May 3, 2006 (Volume 71, Number 85)]
[Notices]               
[Page 26155-26165]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr03my06-118]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53721; File No. SR-NSX-2006-03]

 
Self-Regulatory Organizations; National Stock Exchange\SM\; 
Notice of Filing of a Proposed Rule Change and Amendment Nos. 1 and 2 
Thereto Relating to the Demutualization of the National Stock Exchange

April 25, 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 National Stock Exchange\SM\ (``NSX'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. On April 
19, 2006, the NSX submitted Amendment No. 1 to the proposed rule 
change.\3\ On April 25, 2006, the NSX submitted Amendment No. 2 to the 
proposed rule change.\4\ 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\ Amendment No. 1 (``Amendment No. 1'') makes revisions to the 
proposed: Holdings Certificate of Incorporation, sections 
(b)(iii)(B) and (C); Holdings By-Laws, Article III, Sections 3.1 and 
3.4; NSX By-Laws, Article III, section 3.2(b); and NSX Rule 2.10. In 
addition, Amendment No. 1 adds new proposed section 3.6 to Article 
III of the Holdings By-Laws, requiring Holdings to take reasonable 
steps necessary to cause its officers, directors, and employees to 
consent to the applicability to them of Article III of the Holdings 
By-Laws. Finally, Amendment No. 1 makes corresponding changes to 
Item 3 of Form 19b-4 and Exhibit 1 to describe the effect of the 
foregoing Exhibit 5 revisions and also add a description of proposed 
NSX Rule 2.10.
    \4\ Amendment No. 2 (``Amendment No. 2'') made changes to Item 3 
of Form 19b-4 and Exhibit 1, which changes have been incorporated 
into this notice.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The NSX proposes a series of changes to its corporate structure and 
governance documents to allow for the demutualization of NSX. NSX is 
proposing to ``demutualize'' by converting NSX from an Ohio non-stock, 
nonprofit membership corporation to a Delaware for-profit stock 
corporation. To effect the demutualization, NSX states that it has 
established a Delaware for-profit stock holding company, NSX Holdings, 
Inc. (``Holdings'') that would become the parent company and sole 
stockholder of NSX after the demutualization. NSX would become a 
Delaware for-profit stock corporation that would continue to engage in 
the business of operating a national securities exchange registered 
under Section 6 of the Act.\5\ NSX states that it would continue to 
have self-regulatory responsibilities over its members, and would have 
its own Board of Directors that would manage NSX's business and 
affairs.
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    \5\ 15 U.S.C. 78f.
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    The proposed rule change for implementing the demutualization 
includes the Amended and Restated Certificate of Incorporation of 
Holdings (the ``Holdings Certificate of Incorporation''), Amended and 
Restated By-Laws of Holdings (the ``Holdings By-Laws''), Amended and 
Restated Certificate of Incorporation of National Stock Exchange, Inc. 
(the ``NSX Certificate of Incorporation''), Amended and Restated By-
Laws of National Stock Exchange, Inc. (the ``NSX By-Laws), and revised 
Rules of National Stock Exchange, Inc. (the ``NSX Rules''), Exhibit 5 
of NSX's proposed rule change contains the NSX Certificate of 
Incorporation, the NSX By-Laws, and the NSX Rules, each marked to 
reflect changes from the current Articles of Incorporation, By-Laws, 
and Rules of the Exchange, as well as the new Holdings Certificate of 
Incorporation and the Holdings Bylaws. A summary of these documents is 
provided below. The full text of Exhibit 5 is available on the 

[[Page 26156]]

www.sec.gov,\6\ the Web site of the Exchange at http://www.nsx.com, at 

the principal office of the Exchange, and at the Commission.
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    \6\ The text of Exhibit 5 posted on the Commission's Web site is 
edited to incorporate the changes made in Amendment No. 1.
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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, as 
amended. 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
    Through this proposed rule change, as amended, the Exchange 
proposes a series of changes to the Exchange's corporate structure that 
would allow for the demutualization of the Exchange. The Exchange also 
proposes changes to its rules to implement a proposed equity trading 
permit structure, which would replace the existing structure of 
Exchange membership as a basis for trading rights.
a. Description of Demutualization Transaction
    Currently, NSX is a non-stock, nonprofit Ohio corporation. NSX 
proposes to demutualize by reorganizing as a Delaware for-profit stock 
corporation that would be a direct and wholly-owned subsidiary of a new 
Delaware for-profit stock holding company, Holdings. To accomplish the 
demutualization, NSX has established (i) two new Delaware stock for-
profit corporations: Holdings, a direct and wholly-owned subsidiary of 
NSX, and NSX Delaware Merger Sub, Inc. (``NSX Delaware Merger Sub''), a 
direct and wholly-owned subsidiary of Holdings, and (ii) one transitory 
Ohio stock for-profit corporation, NSX Ohio Merger Sub, Inc. (``NSX 
Ohio Merger Sub''), also a direct and wholly owned subsidiary of 
Holdings.\7\
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    \7\ The Exchange states that the establishment of NSX Ohio 
Merger Sub and the process of demutualization through two mergers 
(as described more fully in this document) are necessitated because 
under Ohio law, NSX, as an Ohio nonprofit corporation, may not merge 
directly with and into a foreign for-profit corporation, such as NSX 
Delaware Merger Sub.
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    Pursuant to an agreement and plan of merger, NSX would merge 
(``Merger 1'') with and into NSX Ohio Merger Sub, with NSX 
Ohio Merger Sub surviving the merger as an Ohio for-profit stock 
corporation that is a direct and wholly-owned subsidiary of Holdings. 
As a result of Merger 1, NSX Ohio Merger Sub will be the 
initial successor-in-interest to NSX. Immediately following Merger 
1, pursuant to a second agreement and plan of merger, NSX Ohio 
Merger Sub would merge (``Merger 2'') with and into NSX 
Delaware Merger Sub, with NSX Delaware Merger Sub surviving the merger 
as a Delaware for-profit stock corporation that is a direct and wholly-
owned subsidiary of Holdings, and renamed National Stock Exchange, Inc. 
For ease of reference, the term ``NSX'' in this document will also 
refer to the Exchange as a Delaware for-profit stock corporation after 
the demutualization.
    The Exchange states that upon completion of Merger 2, NSX, 
the Delaware for-profit stock corporation, would be, in effect, the 
successor-in-interest to NSX, the current Ohio non-stock, nonprofit 
corporation, and would assume all of the assets and liabilities of the 
Exchange, including, without limitation, the adherence to, and the 
performance of, the undertakings under the Order Instituting 
Administrative and Cease-and-Desist Proceedings Pursuant to Sections 
19(b) and 21C of the Securities Exchange Act of 1934, Making Findings 
and Imposing Sanctions, entered by the Commission on May 19, 2005 \8\ 
(the ``Order'') \9\. NSX states that it would continue to engage in the 
business of operating a national securities exchange registered under 
section 6 of the Act.\10\
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    \8\ See Securities Exchange Act Release No. 51714.
    \9\ The Exchange has advised the staff that it may petition the 
Commission to modify the Order in light of the potential 
demutualization and the anticipated changes to the trading platform 
(for which Commission approval will be sought in a subsequent 
filing).
    \10\ 15 U.S.C. 78f. Following the demutualization, the Exchange 
states that earnings of NSX not retained in its business may be 
distributed to its parent, Holdings, and Holdings would be 
authorized to pay dividends to the stockholders of Holdings as and 
when they are declared by the Board of Directors of Holdings, but 
subject to the limitation under the proposed NSX By-Laws that any 
revenues received by NSX from regulatory fees or penalties may not 
be used to pay dividends. See proposed NSX By-Laws, Section 10.4.
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    Presently, the members of NSX hold certificates of proprietary 
membership in NSX and have a right to trade on the exchange operated by 
NSX.\11\ On the effective date of the demutualization (the ``Effective 
Date''), each member of NSX would receive 1,000 shares of Holdings 
Class A common stock \12\ for the first certificate of proprietary 
membership of NSX held by the member and would receive a modestly 
discounted number of shares of Class A common stock (determined by a 
formula set forth in the Merger 1 merger agreement) for each 
additional certificate held. If, however, the total number of Class A 
shares to be received by a member that would hold an equity trading 
permit entitling it to trading access on the Exchange after the 
demutualization (an ``ETP Holder''), together with any Class A shares 
to be received by that member's Related Persons,\13\ would exceed 20% 
of the

[[Page 26157]]

total number of Class A shares issued (and thus be in violation of an 
ownership limitation under the proposed Holdings Certificate of 
Incorporation \14\), that member would receive shares of Class C common 
stock\15\ (which would generally not be entitled to the right to vote) 
in lieu of the shares of Class A common stock that are in excess of the 
20% ownership limitation (and that the member would have received were 
the 20% ownership limitation not in effect under the proposed Holdings 
Certificate of Incorporation).
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    \11\ See infra note 16 and subsection c.(1)(b)(ii) for a 
description of Chicago Board Options Exchange, Incorporated's 
interest in NSX.
    \12\ Holdings would be authorized to issue 1,100,000 shares of 
common stock having a par value of $.0001 per share (of which 
900,000 shares will be designated as Class A common stock, 100,000 
shares will designated as Class B common stock and 100,000 shares 
will be designated as Class C common stock) and 100,000 shares of 
preferred stock having a par value of $.0001 per share. The Class A 
common stock would be entitled to one vote per share, absent a 
provision in the Holdings Certificate of Incorporation fixing or 
denying voting rights. Neither the Class B nor Class C common stock 
would be entitled to vote, unless the matter at issue would alter 
the rights, preferences, privileges or limitations (other than the 
right to vote) of that stock, respectively, without also altering 
the rights, preferences, privileges and limitations of the Class A 
common stock in an identical manner. See proposed Holdings 
Certificate of Incorporation, Article Fourth, and proposed Holdings 
By-Laws, Section 4.10.
    \13\ Under the proposed Holdings Certificate of Incorporation, 
Article Fifth, paragraph (a)(ii), ``Related Persons'' means, with 
respect to any Person: (A) Any ``affiliate'' of such Person (as such 
term is defined in Rule 12b-2 under the Act); (B) any other Person 
with which such first Person has any agreement, arrangement or 
understanding (whether or not in writing) to act together for the 
purpose of acquiring, voting, holding or disposing of shares of the 
capital stock of the Corporation; (C) in the case of a Person that 
is a company, corporation or similar entity, any executive officer 
(as defined under Rule 3b-7 under the Act) or director of such 
Person and, in the case of a Person that is a partnership or limited 
liability company, any general partner, managing member or manager 
of such Person, as applicable; (D) in the case of an ETP Holder, any 
Person that is associated with the ETP Holder (as determined using 
the definition of ``person associated with a member'' as defined 
under Section 3(a)(21) of the Act); (E) in the case of a Person that 
is an individual, any relative or spouse of such Person, or any 
relative of such spouse who has the same home as such Person or who 
is a director or officer of the Corporation or any of its parents or 
subsidiaries; (F) in the case of a Person that is an executive 
officer (as defined under Rule 3b-7 under the Act) or a director of 
a company, corporation or similar entity, such company, corporation 
or entity, as applicable; and (G) in the case of a Person that is a 
general partner, managing member or manager of a partnership or 
limited liability company, such partnership or limited liability 
company, as applicable.
    \14\ This ownership limitation, in addition to other ownership, 
voting and transfer limitations, is described more fully later in 
this document.
    \15\ Each share of Class C common stock issued would be 
convertible, at the option of its holder, to one share of Class A 
common stock upon the satisfaction of certain notification and other 
requirements under the Holdings Certificate of Incorporation, but 
only to the extent that the conversion does not violate the 
limitations on ownership, transfer and voting applicable to Class A 
common stock under the Holdings Certificate of Incorporation, as 
more fully described in this document. See proposed Holdings 
Certificate of Incorporation, Article Fourth, paragraph (d).
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    The Exchanges states that Chicago Board Options Exchange, 
Incorporated (``CBOE'') is not a member of NSX but owns certificates of 
proprietary membership in NSX. In the demutualization, CBOE would 
receive shares of Holdings Class B common stock (which is generally not 
entitled to the right to vote) in exchange for its certificates of 
proprietary membership in NSX that are subject to put and call rights 
under a Termination of Rights Agreement between NSX and CBOE dated 
September 27, 2004 (the ``TORA''),\16\ and would receive shares of 
Holdings Class A common stock in exchange for the remainder of its 
certificates of proprietary membership.\17\ The number of Class A and 
Class B shares received by CBOE would be based on the discount formula 
set forth in the Merger 1 merger agreement.
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    \16\ The Exchange states that, in 1986, NSX and CBOE entered 
into an agreement of affiliation pursuant to which CBOE obtained 
certificates of proprietary membership in NSX and certain rights 
associated with NSX, including the right to hold certain seats on 
the Board of Directors of NSX and certain put rights in connection 
with its certificates of proprietary membership in NSX. Under the 
TORA, the CBOE agreed to relinquish, upon certain terms, certain of 
these rights in exchange for cash payments and other undertakings. 
See Securities Exchange Act Release No. 34-51033 (January 13, 2005), 
70 FR 3085 (January 19, 2005) (File No. SR-NSX-2004-12). See also 
supra subsection c(1)(b)(ii).
    \17\ Each share of Class B common stock would automatically 
convert to one share of Class A common stock upon its transfer, in 
accordance with the TORA, to a bona fide third party purchaser 
unaffiliated with CBOE. See proposed Holdings Certificate of 
Incorporation, Article Fourth, paragraph (c). NSX states that the 
Class B shares would be transferable only under extraordinary 
circumstances.
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    Following the demutualization, persons and entities who have been 
qualified for membership under the Exchange's current Rules and, as a 
result, have access to the Exchange's trading facilities would 
separately receive NSX equity trading permits (``ETPs'') entitling them 
to maintain their trading access to NSX and, as noted above, would be 
referred to as ``ETP Holders.'' Shares of Holdings capital stock and 
ETPs would not be tied together. The Exchange states that, as a result, 
following the demutualization, former NSX members would be able to sell 
the shares of Holdings capital stock they receive in connection with 
the demutualization, subject to the applicable restrictions in the 
proposed Holdings Certificate of Incorporation and Holdings By-Laws (as 
described more fully below), while retaining the ability to trade and 
operate on the Exchange pursuant to their ETPs. NSX states that any 
other person or entity that satisfies the regulatory requirements set 
forth in the NSX Rules also would be able to obtain an ETP without 
regard to whether such person is a stockholder of Holdings.
b. Reasons for the Proposed Demutualization
    There are several benefits that the Exchange believes may result 
from the demutualization of the Exchange.
    The Exchange believes that, by adopting a for-profit approach with 
a view towards optimizing volume, efficiency, and liquidity in the 
markets the Exchange provides, it would be able to better meet the 
demands of, and provide value to, investors, while also preserving the 
ability to provide benefits and opportunities for ETP Holders. 
Additionally, NSX believes that its reorganization into a holding 
company structure could provide increased financing opportunities and 
better access to capital markets, which, as a result, could improve the 
Exchange's business and facilitate strategic initiatives. NSX also 
believes that the creation of Holdings as a for-profit stock 
corporation may present opportunities to enter into strategic 
alliances, while allowing the regulated Exchange business to remain 
separate.
    The Exchange states that it remains committed to its role as a 
national securities exchange and does not believe that a change to a 
for-profit institution will undermine its responsibilities for 
regulating its marketplace. Indeed, as further described below, the 
Exchange believes that it has proposed specific provisions in the 
proposed Holdings By-Laws and NSX By-Laws that reinforce the ability of 
the Exchange to perform its self-regulatory functions. In addition, NSX 
states that it has retained in the proposed NSX By-Laws certain 
governance provisions of its current By-Laws (for example, the 
inclusion and governing structure of a Regulatory Oversight Committee) 
that were required by the Order.
c. Summary of Proposed Rule Change
    The proposed rule change, as amended, is outlined below. In 
general, the proposed rule change, as amended, consists of the proposed 
Holdings Certificate of Incorporation and Holdings By-Laws and the 
proposed changes to the Articles of Incorporation and By-Laws of the 
Exchange that reflect governance and corporate form changes. NSX states 
that the proposed rule change also includes proposed changes to the 
Rules of the Exchange that are necessary to implement the proposed 
equity trading permit structure. NSX also proposes to move certain 
provisions in the current By-Laws of NSX respecting members, listing 
standards, and other matters not relating to the Exchange's corporate 
governance to the NSX Rules.
(1) Corporate Structure
(a) Holdings
    Following the demutualization, Holdings would be the parent company 
and sole stockholder of NSX. NSX states that all of the issued and 
outstanding stock of Holdings initially would be owned by the former 
owners of certificates of proprietary membership in the Exchange.
    As sole stockholder of NSX, Holdings would have the right to elect 
the Board of Directors of NSX, subject to certain provisions in the 
Holdings By-Laws that require Holdings to vote for certain persons 
nominated for ETP Holder Director positions and certain persons 
nominated for CBOE Director positions, in each case in accordance with 
the revised governance documents of NSX. The Holdings Certificate of 
Incorporation and the Holdings By-Laws would govern the activities of 
Holdings.
(i) Holdings Board of Directors
    The business and affairs of Holdings would be managed by its Board 
of Directors (``Holdings Board''). The Holdings Board would consist of 
between 10 and 16 persons, as determined by the Holdings Board, one of 
which shall be the Chief Executive Officer (``CEO'') of Holdings. The 
Holdings Board would initially have 13 directors after the 
demutualization. No person that is subject to any ``statutory

[[Page 26158]]

disqualification'' (within the meaning of Section 3(a)(39) of the Act) 
may be a director of Holdings.\18\
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    \18\ See proposed Holdings Certificate of Incorporation, Article 
Sixth, section (a), and proposed Holdings By-Laws, sections 2.2(a) 
and (b).
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    The directors of Holdings would be divided into three classes, 
which would be as nearly equal in number as the total number of 
directors then constituting the entire Holdings Board. After completion 
of an initial phase-in schedule, the directors of Holdings would serve 
staggered three-year terms, with the term of office of one class 
expiring each year.\19\
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    \19\ See proposed Holdings Certificate of Incorporation, Article 
Sixth, section (b), and proposed Holdings By-Laws, section 2.2(c).
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    The Holdings Board would elect its Chairman from among the 
directors on the Holdings Board, and may elect a vice-chairman to 
perform the functions of the Chairman in his or her absence.\20\
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    \20\ See proposed Holdings By-Laws, section 2.3(a).
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    At each annual meeting of the stockholders of Holdings at which a 
quorum is present, the individuals receiving a plurality of the votes 
cast of the Class A shares would be elected directors of Holdings.\21\ 
At an election of directors, each Holdings stockholder would be 
entitled to one vote for each share of Class A common stock owned by 
that stockholder.\22\ Class B and Class C shares shall not be entitled 
to vote at an election of directors.\23\
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    \21\ See proposed Holdings By-Laws, section 4.8.
    \22\ See proposed Holdings Certificate of Incorporation, Article 
Fourth, paragraph (b), and proposed Holdings By-Laws, section 4.10.
    \23\ See proposed Holdings Certificate of Incorporation, Article 
Fourth, paragraphs (c) and (d).
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    In most cases, vacancies on the Holdings Board would be filled by 
the remaining directors of Holdings. If the vacancy has resulted from a 
director being removed for cause by the stockholders of Holdings, 
however, that vacancy may be filled by the stockholders of Holdings at 
the same meeting at which the director was removed. Any director 
appointed to fill a vacancy will serve until the expiration of the term 
of office of the replaced director or until the end of the term for a 
newly created directorship.\24\
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    \24\ See proposed Holdings By-Laws, section 2.4.
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(ii) Committees of Holdings
    The Holdings Board would have an Audit Committee, a Governance and 
Nominating Committee, and such other committees that the Holdings Board 
establishes.\25\ The Chairman of the Holdings Board would appoint the 
members of all committees of the Holdings Board, and may remove any 
member so appointed, subject to the approval of the Holdings Board.\26\ 
Each committee would have the authority and duties prescribed for it in 
the Holdings By-Laws or by the Holdings Board.\27\
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    \25\ See proposed Holdings By-Laws, section 5.1.
    \26\ See proposed Holdings By-Laws, section 5.2.
    \27\ See proposed Holdings By-Laws, section 5.3.
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(iii) Officers of Holdings
    The officers of Holdings would be a CEO, a President, a Secretary, 
a Treasurer, and such other officers as the Holdings Board 
determines.\28\ The CEO would be responsible to the Holdings Board for 
management of the business affairs of Holdings.\29\ The officers of 
Holdings would have the duties and authority set forth in the Holdings 
By-Laws or given to them by the Holdings Board, and in the case of the 
President, the Secretary, and the Treasurer, given to them by the Chief 
Executive Officer.\30\ Any two or more offices may be held by the same 
person, except that the Secretary may not also serve as the CEO or the 
President. No person that is subject to any ``statutory 
disqualification'' (within the meaning of section 3(a)(39) of the Act) 
may be an officer of Holdings.\31\
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    \28\ See proposed Holdings By-Laws, section 6.1.
    \29\ See proposed Holdings By-Laws, section 6.4.
    \30\ See proposed Holdings By-Laws, sections 6.1, 6.4, 6.5, 6.6, 
and 6.7.
    \31\ See proposed Holdings By-Laws, section 6.1.
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(iv) Stockholder Restrictions
    The Holdings Certificate of Incorporation and the Holdings By-Laws 
place certain restrictions on the ability to transfer, own, and vote 
the capital stock of Holdings.
(1) Restrictions on voting
    The Holdings Certificate of Incorporation prohibits any Person,\32\ 
either alone or together with its Related Persons, from (a) voting or 
giving a proxy or consent with respect to shares representing more than 
20% of the voting power of the then-issued and outstanding capital 
stock of Holdings; or (b) entering into any agreement, plan, or 
arrangement that would result in the shares of Holdings subject to that 
agreement, plan, or arrangement not being voted on a matter, or any 
proxy relating thereto being withheld, where the effect of that 
agreement, plan, or arrangement would be to enable any Person, alone or 
together with its Related Persons, to obtain more than 20% of the 
voting power of the then-issued and outstanding capital stock of 
Holdings.\33\
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    \32\ Article Fifth of the proposed Holdings Certificate of 
Incorporation defines a ``Person'' to mean ``an individual, 
partnership (general or limited), joint stock company, corporation, 
limited liability company, trust or unincorporated organization, or 
any governmental entity or agency or political subdivision 
thereof.''
    \33\ See proposed Holdings Certificate of Incorporation, Article 
Fifth, paragraph (b)(ii)(C).
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    This restriction would not apply to the Class B or Class C common 
stock and, as to the Class A common stock owned by Persons other than 
ETP Holders and their Related Persons, may be waived by Holdings Board 
pursuant to a resolution adopted by the Holdings Board.\34\ Before 
adopting such resolution, however, the Holdings Board must determine 
that, among other things, the waiver of the voting limitation will not 
impair the ability of NSX to carry out its functions and 
responsibilities under the Act and the rules and regulations 
promulgated thereunder, and will not impair the Commission's ability to 
enforce the Act and the rules and regulations promulgated 
thereunder.\35\ In addition, the Holdings Board also must determine 
that a Person and its Related Persons that would vote more than 20% of 
the outstanding stock of Holdings are not subject to an applicable 
``statutory disqualification'' (within the meaning of section 3(a)(39) 
of the Act).\36\ Finally, any resolution of the Holdings Board that 
would permit a Person to vote more than 20% of the outstanding stock of 
Holdings must be filed with and approved by the Commission before it 
becomes effective.\37\
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    \34\ See proposed Holdings Certificate of Incorporation, Article 
Fifth, paragraphs (b)(iii)(A) and (B). See Amendment No. 1, supra 
note 3.
    \35\See proposed Holdings Certificate of Incorporation, Article 
Fifth, paragraph (b)(iii)(B).
    \36\ 15 U.S.C. 78c(a)(39); See proposed Holdings Certificate of 
Incorporation, Article Fifth, paragraph (b)(iv).
    \37\See proposed Holdings Certificate of Incorporation, Article 
Fifth, paragraph (b)(iii)(B).
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(2) Restrictions on ownership
    Under the proposed Holdings Certificate of Incorporation, no 
Person, either alone or together with its Related Persons, may own 
shares constituting more than 40% of any class of capital stock of 
Holdings (other than a class of stock without general voting 
rights).\38\ The Holdings Board may waive this ownership limitation 
pursuant to a resolution adopted by the Holdings Board. Before adopting 
such resolution, however, the Holdings Board must determine that, among 
other things, the waiver of the ownership limitation would not impair 
the ability of NSX to carry out its functions and responsibilities 
under the Act and the rules and regulations promulgated

[[Page 26159]]

thereunder and would not impair the Commission's ability to enforce the 
Act and the rules and regulations promulgated thereunder.\39\
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    \38\ See proposed Holdings Certificate of Incorporation, Article 
Fifth, paragraphs (b)(ii)(A) and (b)(iii)(A).
    \39\ See proposed Holdings Certificate of Incorporation, Article 
Fifth, paragraph (b)(iii)(B).
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    In addition, the Holdings Board also must determine that any Person 
and its Related Persons that would own more than 40% of any class of 
capital stock of Holdings are not subject to any applicable ``statutory 
disqualification'' (within the meaning of section 3(a)(39) of the 
Act).\40\ Finally, any Holdings Board resolution that would permit 
ownership of Holdings capital stock in excess of the ownership 
limitation described above must be filed with and approved by the 
Commission before it becomes effective.\41\
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    \40\ 15 U.S.C. 78c(a)(39); see proposed Holdings Certificate of 
Incorporation, Article Fifth, paragraph (b)(iv).
    \41\ See proposed Holdings Certificate of Incorporation, Article 
Fifth, paragraphs (b)(iii)(B) and (C).
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    In addition to the ownership restriction described above, no ETP 
Holder, whether alone or together with its Related Persons, may own 
shares constituting more than 20% of any class of capital stock of 
Holdings.\42\ However, this ownership restriction would not apply to 
any ETP Holder, with respect to shares of Class C common stock of 
Holdings issued to the ETP Holder in connection with, and from the date 
of, the demutualization of NSX so long as the ETP Holder becomes 
compliant with the ownership limitation promptly after such 
issuance.\43\
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    \42\ See proposed Holdings Certificate of Incorporation, Article 
Fifth, paragraph (b)(ii)(B).
    \43\ See proposed Holdings Certificate of Incorporation, Article 
Fifth, paragraph (b)(iii)(C). See Amendment No. 1, supra note 3.
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(3) Other stockholder ownership and voting restriction requirements
    The Exchange states that the proposed Holdings Certificate of 
Incorporation contains several provisions that would enable Holdings to 
enforce restrictions on the ownership and voting of Holdings capital 
stock described in the preceding section. Specifically, if a 
stockholder purports to sell, transfer, assign, or pledge to any Person 
(other than Holdings) any shares of Holdings that would violate the 
ownership restrictions, Holdings would record on its books the transfer 
of only the number of shares that would not violate the restrictions 
and would treat the remaining shares as owned by the purported 
transferor, for all purposes, including, without limitation, voting, 
payment of dividends, and distributions.\44\
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    \44\ See proposed Holdings Certificate of Incorporation, Article 
Fifth, paragraph (d).
---------------------------------------------------------------------------

    In addition, if any stockholder purports to vote, or to grant any 
proxy or enter into any agreement, plan, or arrangement relating to the 
voting of shares that would violate the voting restrictions, Holdings 
would not honor such vote, proxy, or agreement, plan, or other 
arrangement to the extent that the restrictions would be violated, and 
any shares subject to that arrangement would not be entitled to be 
voted to the extent of the violation.\45\ Further, if any stockholder 
purports to sell, transfer, assign, pledge, vote, or own any shares 
that would violate the ownership and voting restrictions, Holdings 
would have the right to, and would generally be required to promptly, 
redeem such shares at a price equal to the par value of the shares.\46\ 
Also, a stockholder that alone or together with its Related Persons 
owns five percent or more of the then outstanding shares of the capital 
stock of Holdings entitled to vote in an election of directors must, 
upon acquiring knowledge of such ownership, immediately give the 
Holdings Board written notice of such ownership.\47\ Holdings may also 
require any Person reasonably believed to be subject to and in 
violation of the voting and ownership restrictions to provide to 
Holdings information relating to such potential violation.\48\
---------------------------------------------------------------------------

    \45\ Id.
    \46\ See proposed Holdings Certificate of Incorporation, Article 
Fifth, paragraph (e).
    \47\ See proposed Holdings Certificate of Incorporation, Article 
Fifth, paragraph (c)(i). Such notice must also be updated under 
certain circumstances. See proposed Holdings Certificate of 
Incorporation, Article Fifth, paragraph (c)(ii).
    \48\ See proposed Holdings Certificate of Incorporation, Article 
Fifth, paragraph (c)(iii).
---------------------------------------------------------------------------

(4) Restrictions on transfer
    Members, former members, and other equity owners of NSX who receive 
shares of capital stock of Holdings in the demutualization may not 
sell, transfer, or otherwise dispose of those shares for the first 
thirty days following their issuance, unless the Holdings Board waives 
this transfer restriction.\49\
---------------------------------------------------------------------------

    \49\ See proposed Holdings Certificate of Incorporation, Article 
Fifth, paragraph (b)(i).
---------------------------------------------------------------------------

    Also, unless waived by the Holdings Board or pursuant to a 
redemption of shares by Holdings, each stockholder of Holdings would be 
prohibited from selling, transferring, or otherwise disposing of common 
shares of Holdings except in amounts of at least 1,000 shares (unless 
the stockholder is transferring all shares owned), and no stockholder 
would be permitted to transfer any capital stock of Holdings (other 
than pursuant to a redemption of shares by Holdings) until all amounts 
due and owing from that stockholder to NSX have been paid.\50\
---------------------------------------------------------------------------

    \50\ See proposed Holdings By-Laws, sections 9.4 and 9.5(b).
---------------------------------------------------------------------------

    In the event that a stockholder desires to transfer shares of 
capital stock of Holdings to any person (other than an affiliate of the 
stockholder or to another holder of the same class of capital stock) 
prior to January 1, 2011, Holdings would have a right of first refusal 
permitting it to purchase those shares, except for transfers by 
bequest, operation of law, or judicial decree under certain 
circumstances.\51\
---------------------------------------------------------------------------

    \51\ See proposed Holdings By-Laws, section 9.6.
---------------------------------------------------------------------------

    In addition to these transfer restrictions, the Exchange states 
that shares of Holdings would be ``restricted securities'' under the 
Securities Act of 1933 (``Securities Act'') and only may be transferred 
pursuant to an effective registration statement under the Securities 
Act and in accordance with applicable state securities laws or, if an 
exemption from registration is available, upon delivery to Holdings of 
a satisfactory opinion of counsel that such transfer may be effected 
pursuant to the exemption. In addition, counsel to Holdings may require 
delivery of documentation to ensure that the transfer complies with the 
Securities Act and state securities laws before such transfer is 
effected.\52\ The Exchange states that Holdings has no present 
intention to register its common stock under the Securities Act or the 
Act, and, unless waived in writing by the Holdings Board, no transfer 
would be honored by Holdings that would cause Holdings to have to do so 
or to become subject to the reporting requirements of the Act.\53\
---------------------------------------------------------------------------

    \52\ See proposed Holdings By-Laws, section 9.5(a).
    \53\ See proposed Holdings By-Laws, section 9.5(c).
---------------------------------------------------------------------------

(v) Self-Regulatory Function and Oversight.
    NSX states that the Holdings By-Laws contain various provisions 
designed to protect the independence of the self-regulatory function of 
NSX and to clarify the Commission's oversight responsibilities. For 
example, under the Holdings By-Laws, for as long as Holdings controls 
NSX, the Holdings Board and the directors, officers, and employees of 
Holdings must give due regard to the preservation of the independence 
of the self-regulatory function of NSX and to its obligations to 
investors and the general public, and are prohibited from taking 
actions that would interfere with the effectuation of

[[Page 26160]]

decisions by the Board of Directors of NSX (``NSX Board'') relating to 
NSX's regulatory functions, including disciplinary matters, or which 
would interfere with NSX's ability to carry out its responsibilities 
under the Act.\54\
---------------------------------------------------------------------------

    \54\ See proposed Holdings By-Laws, section 3.1.
---------------------------------------------------------------------------

    The Holdings By-Laws also contain a specific requirement that all 
books and records of NSX, and the information contained therein, that 
reflect confidential information pertaining to the self-regulatory 
function of NSX, which come into the possession of Holdings, must be 
retained in confidence by Holdings and its Board, officers, employees, 
and agents, and must not be used for any non-regulatory purposes.\55\ 
In addition, the Holdings By-Laws provide that, to the extent they are 
related to the activities of NSX, the books, records, premises, 
officers, directors, agents, and employees of Holdings are deemed to be 
the books, records, premises, officers, directors, agents, and 
employees of NSX for the purposes of, and subject to oversight pursuant 
to, the Act.\56\
---------------------------------------------------------------------------

    \55\ See proposed Holdings By-Laws, section 3.2.
    \56\ See proposed Holdings By-Laws, section 3.3. This provision 
also requires Holdings to maintain its books and records in the 
United States.
---------------------------------------------------------------------------

    NSX states that, pursuant to the Holdings By-Laws, Holdings must 
comply with the Federal securities laws and the rules and regulations 
promulgated thereunder. With regard to the Commission's ability to 
oversee the activities of Holdings, the Exchange states that the 
Holdings By-Laws also provide that Holdings must cooperate with the 
Commission and NSX pursuant to and to the extent of their respective 
regulatory authority, and that the officers, directors, employees, and 
agents of Holdings, by virtue of their acceptance of such position, are 
deemed to agree to cooperate with the Commission and NSX in respect of 
the Commission's oversight responsibilities regarding NSX and the self-
regulatory function and responsibilities of NSX.\57\ In addition, the 
Holdings By-Laws provide that Holdings, its officers, directors, 
employees and agents, by virtue of their acceptance of such positions, 
will be deemed to irrevocably submit to the jurisdiction of the U.S. 
federal courts, the Commission and NSX, for the purpose of any suit, 
action, or proceeding pursuant to the U.S. Federal securities laws, and 
the rules and regulations promulgated thereunder, arising out of, or 
relating to, the activities of NSX.\58\
---------------------------------------------------------------------------

    \57\ See proposed Holdings By-Laws, section 3.4. See Amendment 
No. 1, supra note 3.
    \58\ See proposed Holdings By-Laws, section 3.5. Pursuant to the 
Holdings By-Laws, Holdings would be required to take reasonable 
steps necessary to cause its officers, directors, and employees, 
prior to accepting a position as an officer, director, or employee, 
as applicable, of Holdings, to consent in writing to the 
applicability to them of the provisions described in this and the 
preceding two paragraphs with respect to their activities related to 
NSX; see Amendment No. 1, supra note 3.
---------------------------------------------------------------------------

    Finally, the Holdings Certificate of Incorporation and the Holdings 
By-Laws provide that, as long as Holdings controls NSX, before any 
change to the Holdings Certificate of Incorporation or the Holdings By-
Laws, respectively, will be effective, such change must be submitted to 
the NSX Board, and if the NSX Board determines that the change must be 
filed with or filed with and approved by the Commission before it may 
be effective, the change will not be effective until it is filed with, 
or filed with and approved by, the Commission, as the case may be.\59\
---------------------------------------------------------------------------

    \59\ See proposed Holdings Certificate of Incorporation, Article 
Twelfth, and proposed Holdings By-Laws, Article VIII. These 
provisions additionally state, respectively, that (i) any change to 
the proposed Holdings Certificate of Incorporation must also be 
first approved by the Holdings Board and (ii) any change to the 
proposed Holdings By-Laws may be made by either the stockholders of 
Holdings or the Holdings Board. In addition, under Article Fourth, 
paragraph (e) of the proposed Holdings Certificate of Incorporation, 
holders of preferred stock (voting separately as single class) must 
approve any change to the Holdings Certificate of Incorporation that 
would change the terms of that preferred stock. No preferred stock 
is currently issued and outstanding.
---------------------------------------------------------------------------

(b) NSX
    Following the demutualization, NSX would become a Delaware for-
profit stock corporation, with the authority to issue 1,000 shares of 
common stock. At all times, all of the voting stock of NSX would be 
owned by Holdings.\60\ NSX states that it would continue to be the 
entity registered as a national securities exchange under section 6 of 
the Act \61\ and, accordingly, NSX would continue to be a self-
regulatory organization (``SRO''). Moreover, NSX states that it would 
continue to adhere to the undertakings in the Order \62\ including, 
without limitation, the structure provisions of a Regulatory Oversight 
Committee, the separation of the regulatory functions from the 
commercial interests of the Exchange, and the retention of third 
parties to review the Exchange's regulatory functions.
---------------------------------------------------------------------------

    \60\ See proposed NSX Certificate of Incorporation, Article 
Fourth.
    \61\ 15 U.S.C. 78f.
    \62\ See supra note 9.
---------------------------------------------------------------------------

(i) Governing Documents and NSX Rules
    The proposed NSX Certificate of Incorporation,\63\ NSX By-Laws, and 
NSX Rules (with the proposed changes described in this document) would 
govern the activities of NSX. NSX states that these rules and 
governance documents are proposed to reflect, among other things, NSX's 
status as a wholly-owned subsidiary of Holdings, its management by the 
NSX Board and its designated officers, and its self-regulatory 
responsibilities pursuant to NSX's registration under section 6 of the 
Act. NSX states that it has designed these proposed governance 
documents to be generally consistent with NSX's current governance 
structure, with certain changes based upon its proposed new corporate 
form. NSX states that none of these proposed changes are in 
contravention of the Order.
---------------------------------------------------------------------------

    \63\ Due to differences in terminology between Ohio and Delaware 
law, the Exchange's Articles of Incorporation are proposed to be 
renamed its ``Certificate of Incorporation.''
---------------------------------------------------------------------------

(ii) Board of Directors
    After the demutualization, the NSX Board would initially consist of 
13 directors. The NSX Board would be initially comprised of the CEO of 
NSX, 3 ETP Holder Directors,\64\ 7 Independent Directors,\65\ and 2 
directors who are executive officers of CBOE, its members,\66\ or 
executive officers of CBOE member organizations.\67\ This composition 
is consistent with the composition of the Exchange's current Board of 
Directors, which consists of the CEO of NSX, 3 proprietary members or 
executive officers of proprietary members, 7 independent directors, and 
2 executive officers of CBOE, CBOE members, or executive officers of 
CBOE member organizations.
---------------------------------------------------------------------------

    \64\ An ETP Holder Director is defined under the proposed NSX 
By-Laws as a director who is an ETP Holder or a director, officer, 
managing member or partner of an entity that is an ETP Holder. See 
proposed NSX By-Laws, section 1.1(E)(2).
    \65\ An Independent Director is defined under the proposed NSX 
By-Laws as a member of the NSX Board that the NSX Board has 
determined to have no material relationship with NSX or any 
affiliate of NSX, or any ETP Holder or any affiliate of any such ETP 
Holder, other than as a member of the NSX Board. See proposed NSX 
By-Laws, section 1.1(I)(1). This definition is consistent with the 
definition of Independent Director in the current By-Laws of NSX. 
NSX states that at least one Independent Director will be 
representative of investors; see Amendment No. 1, supra note 3.
    \66\ A CBOE member is defined under the proposed NSX By-Laws as 
an individual CBOE member or a CBOE member organization that is a 
regular member or special member of CBOE (as such terms are 
described in the Constitution of the CBOE), as such CBOE members may 
exist from time to time. See proposed NSX By-Laws, section 
1.1(C)(2).
    \67\ See proposed NSX By-Laws, section 3.2(a).
---------------------------------------------------------------------------

    Under the proposed rule change, the NSX Board may by resolution 
increase its size to up to 20 directors. Directors added to the NSX 
Board to fill these new director positions will be (i) Independent 
Directors, to the extent necessary for the NSX Board to include

[[Page 26161]]

at least 50% Independent Directors; (ii) ETP Holder Directors, to the 
extent necessary for the NSX Board to include at least 20% ETP Holder 
Directors; and (iii) persons who do not qualify as Independent 
Directors (``At-Large Directors''), for the remainder of the positions 
added to the NSX Board that are not filled with Independent Directors 
or ETP Holder Directors pursuant to clauses (i) and (ii) above. At all 
times, the NSX Board must include the CEO of NSX, at least 50% 
Independent Directors and 3 ETP Holder Directors (or such greater 
number of ETP Holder Directors as is necessary to comprise at least 20% 
of the NSX Board).\68\
---------------------------------------------------------------------------

    \68\ See proposed NSX By-Laws, section 3.2(b); see Amendment No. 
1, supra note 3.
---------------------------------------------------------------------------

    NSX states that, consistent with the current By-Laws of NSX, no two 
or more directors under the proposed NSX By-Laws may be partners, 
officers, or directors of the same person or be affiliated with the 
same person, unless such affiliation is with a national securities 
exchange or Holdings.\69\ Directors of NSX other than the CEO and the 
CBOE Directors would be divided into three classes, consisting as 
nearly as possible of equal numbers of directors.\70\ After completion 
of an initial phase-in schedule, these directors would serve for 
staggered three-year terms, with the term of one class expiring each 
year. The CEO's appointment as a director would coincide with his or 
her term as CEO of NSX.\71\ The CBOE Directors would each serve a one 
year term.\72\
---------------------------------------------------------------------------

    \69\ See proposed NSX By-Laws, section 3.2(c). NSX states that 
the current By-Laws of NSX prohibit two or more directors from being 
partners, officers, or directors of the same person or affiliated 
with the same person, except for affiliations with national 
securities exchanges.
    \70\ See proposed NSX By-Laws, section 3.4. NSX states that this 
board framework is consistent with the current By-Laws of NSX.
    \71\ See proposed NSX By-Laws, section 3.4(a). NSX states that 
this provision is consistent with the current By-Laws of NSX.
    \72\ See proposed NSX By-Laws, section 3.4(d). NSX states that 
this provision is consistent with the current By-Laws of NSX.
---------------------------------------------------------------------------

    NSX states that, consistent with the current By-Laws of NSX, under 
the proposed NSX By-Laws, the NSX Board is subject to change upon 
certain events in accordance with the TORA between CBOE and NSX.\73\ 
Under the TORA, CBOE was provided with 4 put rights to transfer its 
equity interests in NSX to NSX and NSX was provided with 4 call rights 
on those equity interests. NSX states that, as of March 10, 2006, the 
first of these put rights was exercised by CBOE, decreasing the number 
of director positions of NSX filled by a representative of CBOE from 3 
to 2 and increasing the number of positions filled by independent 
directors from 6 to 7. NSX states that, under the proposed NSX By-Laws:
---------------------------------------------------------------------------

    \73\ See generally proposed NSX By-Laws, section 3.3. The 
current Board of Directors of NSX is also subject to these 
provisions of the TORA.
---------------------------------------------------------------------------

     On the second closing of a put or call under the TORA, the 
number of positions on the NSX Board filled by representatives of CBOE 
will be reduced from 2 to 1. The vacant director position must be 
filled by an At-Large Director, unless an Independent Director is 
needed to maintain at least 50% Independent Directors on the NSX 
Board.\74\
---------------------------------------------------------------------------

    \74\ See proposed NSX By-Laws, section 3.3(a). The current By-
Laws of NSX permit the vacant director position to be filled by an 
independent director or a proprietary member director.
---------------------------------------------------------------------------

     On the earlier of the date CBOE owns less than 5% of the 
outstanding capital stock of Holdings or the third anniversary of the 
fourth closing of a put or call under the TORA, CBOE's appointed 
positions on the NSX board will decrease to zero. The vacant director 
position must be filled with an At-Large Director, unless an 
Independent Director is needed to maintain at least 50% Independent 
Directors on the NSX Board.\75\
---------------------------------------------------------------------------

    \75\ See proposed NSX By-Laws, section 3.3(b). The current By-
Laws of NSX permit the vacant director position to be filled by an 
independent director or a proprietary member director.
---------------------------------------------------------------------------

    The NSX Board would elect its Chairman from among the directors of 
the NSX Board. The Chairman of the NSX Board may also serve as the CEO 
and President of NSX, but may hold no other offices in NSX. Unless the 
Chairman also serves as the CEO of NSX, the NSX Board must elect the 
Chairman from among the Independent Directors of the NSX Board.\76\
---------------------------------------------------------------------------

    \76\ See proposed NSX By-Laws, section 3.6.
---------------------------------------------------------------------------

    In most cases, vacancies on the NSX Board would be filled by the 
remaining directors of NSX. If the vacancy has resulted from a director 
being removed for cause by the stockholders of NSX, however, that 
vacancy may be filled by the stockholder of NSX (i.e., Holdings) at the 
same meeting at which the director was removed. Any director appointed 
to fill a vacancy would serve until the expiration of the term of 
office of the replaced director or until the end of the term for a 
newly-created directorship.\77\
---------------------------------------------------------------------------

    \77\ See proposed NSX By-Laws, section 3.7(a). NSX states that 
this provision is consistent with, and expands upon, the current By-
Laws of NSX.
---------------------------------------------------------------------------

(iii) Nomination and Election of Directors
    After the formation of the initial NSX Board, the NSX Governance 
and Nominating Committee would nominate directors for each director 
position (other than CBOE director positions) standing for election at 
the annual meeting of stockholders that year. Candidates for CBOE 
Directors would be nominated by the Board of Directors of CBOE at its 
annual meeting or within 20 days of NSX's annual stockholders' meeting. 
Because ETPs are not equity interests in NSX, ETP Holders are not 
entitled to directly elect members of the NSX Board. Rather, Holdings, 
as the sole stockholder of NSX, would have the sole right and the 
obligation to vote for the directors of the NSX Board.\78\ However, NSX 
states that, to ensure that ETP Holders are afforded fair 
representation as required under section 6(b)(3) of the Act,\79\ NSX 
has proposed a procedure, similar to one already in place under the 
current By-Laws of NSX, whereby ETP Holder Directors and ETP Holders 
would be involved in the selection of ETP Holder Director nominees.\80\
---------------------------------------------------------------------------

    \78\ Under section 10.5(a) of the proposed By-Laws of Holdings, 
the power to vote the stock of NSX held by Holdings would be in the 
CEO of Holdings, unless the Holdings Board instructs otherwise or 
unless the Holdings Board or the CEO of Holdings confers such power 
on another person.
    \79\ 15 U.S.C. 78f(b)(3).
    \80\ See proposed NSX By-Laws, section 3.5.
---------------------------------------------------------------------------

    Specifically, the ETP Holder Director Nominating Committee of NSX 
(which would be composed solely of ETP Holder Directors and/or ETP 
Holder representatives) would consult with the NSX Governance and 
Nominating Committee, the Chairman, and the CEO of NSX and solicit 
comments from ETP Holders for the purpose of approving and submitting 
names of ETP Holder Director candidates. These initial candidates for 
nomination would be announced to ETP Holders, who would then have the 
opportunity to identify additional candidates for nomination to ETP 
Holder Director positions by submitting a petition signed by at least 
ten percent of the ETP Holders. An ETP Holder may endorse as many 
candidates as there are ETP Holder Director positions to be filled. If 
no petitions are submitted within the time frame prescribed by the NSX 
By-Laws, the initial candidates approved and submitted by the ETP 
Holder Director Nominating Committee would be nominated. If one or more 
valid petitions are submitted, the ETP Holders would vote on the entire 
group of potential candidates, and the individuals receiving the 
largest number of votes would be the ETP Holder

[[Page 26162]]

Director nominees.\81\ NSX states that, under the Holdings By-Laws, the 
person with the power to vote the stock of NSX held by Holdings must 
vote to elect the ETP Holder Director candidates nominated in 
accordance with the foregoing procedure.\82\
---------------------------------------------------------------------------

    \81\ Under section 3.5(e) of the proposed NSX By-Laws, each ETP 
Holder, regardless of its affiliation with other ETP Holders, will 
have one vote with respect to each ETP Holder Director position to 
be filled, but may not cast such votes cumulatively. NSX states 
that, these nomination provisions are generally consistent with the 
current By-Laws of NSX. Under the current By-Laws of NSX, 
independent directors are nominated by the Nominating Committee 
subject to approval by the Board of Directors of NSX. The CBOE 
directors are elected by the Board of Directors of CBOE at its 
January meeting or as soon thereafter as possible. The current By-
Laws of NSX also contain a procedure for proprietary member director 
nominations, whereby one proprietary member director candidate is 
nominated by the Nominating Committee and additional proprietary 
member director candidates may be nominated by a petition signed by 
ten percent or more of the proprietary members. At an annual 
election during the annual meeting of members, the proprietary 
members vote for the proprietary member directors among the 
nominated candidates.
    \82\ Under section 10.5(b) of the proposed By-Laws of Holdings, 
the person with power to vote the stock of NSX held by Holdings must 
vote for the ETP Holder Directors and CBOE Directors nominated in 
accordance with the proposed NSX Certificate of Incorporation and 
NSX By-Laws.
---------------------------------------------------------------------------

(iv) Committees
    The NSX Board would have the following committees: (1) A Business 
Conduct Committee; (2) a Securities Committee; (3) an Appeals 
Committee; (4) a Governance and Nominating Committee; (5) an ETP Holder 
Director Nominating Committee; (6) a Regulatory Oversight Committee; 
(7) a Compensation Committee; (8) an Executive Committee; and (9) an 
Audit Committee.\83\ The NSX Board may establish other committees from 
time to time. Each committee would have the authority and 
responsibilities prescribed for it in the NSX By-Laws, the rules of the 
Exchange, or by the NSX Board.\84\
---------------------------------------------------------------------------

    \83\ See proposed NSX By-Laws, section 5.1. NSX states that, 
under the current By-Laws of NSX, the standing committees of NSX are 
a Membership Committee, a Business Conduct Committee, a Securities 
Committee, an Appeals Committee, a Nominating Committee, and a 
Regulatory Oversight Committee.
    \84\ See proposed NSX By-Laws, sections 5.1 and 5.3.
---------------------------------------------------------------------------

    The Chairman of the NSX Board would appoint, and may remove, the 
members of the committees, subject to the approval of the NSX 
Board.\85\ Each committee must have at least 3 members.\86\ The 
Executive Committee would have the powers that the NSX Board delegates 
to it, except the power to change the membership of, or fill vacancies 
in, the Executive Committee.\87\ The ETP Holder Director Nominating 
Committee would have the power to approve and submit names of 
candidates for election to the position of ETP Holder Director in 
accordance with the NSX By-Laws.\88\ The Regulatory Oversight Committee 
shall oversee all of the regulatory functions and responsibilities of 
NSX and advise the NSX Board on regulatory matters.\89\ The Regulatory 
Oversight Committee's duties and responsibilities are outlined in its 
charter. NSX states that the Regulatory Oversight Committee's charter 
following demutualization would be the same as the charter previously 
filed with the Commission, and is consistent with the terms of the 
Order.\90\
---------------------------------------------------------------------------

    \85\ Under section 5.2 of the proposed NSX By-Laws, the terms of 
committee members are subject to the appointment and removal process 
of the Chairman and NSX Board. Under the current By-Laws of NSX, 
terms of committee members expire at the regular meeting of the 
Board of Directors of NSX after the corresponding annual election 
meeting, except for members of the Nominating Committee whose stated 
term is 1 year.
    \86\ See proposed NSX By-Laws, section 5.2. This provision is 
consistent with the current By-Laws of NSX.
    \87\ See proposed NSX By-Laws, section 5.5. This provision is 
consistent with the current By-Laws of NSX.
    \88\ See proposed NSX By-Laws, section 5.7.
    \89\ See proposed NSX By-Laws, section 5.6.
    \90\ See Securities Exchange Act Release No. 34-52573 (October 
7, 2005), 70 FR 60113 (October 14, 2005) (File No. SR-NSX-2005-07).
---------------------------------------------------------------------------

(v) Management
    The officers of NSX would be a CEO, a President, a Chief Regulatory 
Officer, a Secretary, and a Treasurer, and such other officers as the 
NSX Board may determine.\91\ Any two or more offices may be held by the 
same person, except that the Chief Regulatory Officer and the Secretary 
may not be the CEO or the President.\92\ The Chairman of the NSX Board, 
subject to approval of the NSX Board, may designate one or more 
officers or other employees of NSX to serve as an Arbitration Director, 
who would perform or delegate all ministerial duties in connection with 
matters submitted for arbitration pursuant to the rules of NSX.\93\
---------------------------------------------------------------------------

    \91\ See proposed NSX By-Laws, section 6.1. Under the current 
By-Laws of NSX, the officers of NSX are a Chairman of the Board, 
President, Secretary, Treasurer, and such other officers as may be 
appointed by the Board of Directors of NSX.
    \92\ See proposed NSX By-Laws, section 6.1. Under the current 
By-Laws of NSX, the Secretary may not hold either the office of 
Chairman of the Board or President.
    \93\ See proposed NSX By-Laws, section 6.6. NSX states that this 
provision is consistent with the current By-Laws of NSX.
---------------------------------------------------------------------------

(vi) Self-Regulatory Function and Oversight
    As noted above, following the demutualization NSX would continue to 
be registered as a national securities exchange under section 6 of the 
Act and thus would continue to be an SRO.\94\ The Exchange states that, 
as an SRO, NSX would be obligated to carry out its statutory 
responsibilities, including enforcing compliance by ETP Holders with 
the provisions of the federal securities laws and the applicable rules 
of NSX. Further, NSX states that it would retain the responsibility to 
administer and enforce the rules that govern NSX and the activities of 
its ETP Holders. In addition, NSX states that it would continue to be 
required to file with the Commission, pursuant to section 19(b) of the 
Act \95\ and Rule 19b-4 thereunder,\96\ any changes to its rules and 
governing documents. The Exchange states that the structural 
protections adopted by NSX pursuant to the Order to ensure that NSX's 
regulatory functions are independent from the commercial interests of 
NSX and its members would remain in effect following demutualization.
---------------------------------------------------------------------------

    \94\ See 15 U.S.C. 78c(a)(26).
    \95\ 15 U.S.C. 78s(b).
    \96\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

    NSX states that, like the proposed Holdings By-Laws, the proposed 
NSX By-Laws contain specific provisions relating to the self-regulatory 
function of NSX.\97\ For example, the proposed NSX By-Laws require the 
NSX Board to consider applicable requirements under Section 6(b) of the 
Act in connection with the management of the Exchange.\98\ In addition, 
meetings of the NSX Board and of the committees of NSX that pertain to 
the self-regulatory function of NSX must be closed to persons who are 
not members of the NSX Board or NSX officers, staff, counsel, or other 
advisors whose participation is necessary or appropriate to the self-
regulatory function of NSX, or representatives of the Commission.\99\
---------------------------------------------------------------------------

    \97\ See proposed NSX By-Laws, Article X.
    \98\ See proposed NSX By-Laws, section 10.1. Section 6(b) of the 
Act requires, among other things, that the Exchange's rules be 
designed to protect investors and the public interest. It also 
requires that the Exchange be so organized that it has the capacity 
to carry out the purposes of the Act and to enforce compliance by 
its members with the Act, the rules and regulations promulgated 
thereunder, and the rules of the Exchange.
    \99\ See proposed NSX By-Laws, section 10.2. In addition, the 
Exchange states that members of the Holdings Board who are also not 
members of the NSX Board and any officers, staff, counsel, or 
advisors of Holdings who do not hold similar positions with respect 
to NSX would not be allowed to participate in any meeting of the NSX 
Board (or any committee of NSX) that pertains to the self-regulatory 
function of NSX. NSX states that these requirements and the 
requirements relating to the confidentiality of records are not, 
however, designed to prevent the Exchange from sharing with Holdings 
the type of information about the Exchange's business that would 
ordinarily be shared with a parent corporation, including 
information relating to the Exchange's compliance with applicable 
laws, reports from the Commission or others evaluating the 
Exchange's self-regulatory programs, and information about the 
trading activities and business strategies of the Exchange's ETP 
Holders.

---------------------------------------------------------------------------

[[Page 26163]]

    Further, the NSX books and records reflecting confidential 
information relating to the self-regulatory function of NSX must be 
kept confidential, must not be used for non-regulatory purposes, and 
must not be made available to any person other than those directors, 
officers, and agents of NSX to the extent necessary or appropriate to 
properly discharge NSX's self-regulatory responsibilities, and the 
books and records of NSX must be maintained in the U.S.\100\ The 
proposed NSX By-Laws also provide that any revenues received by NSX 
from fees derived from its regulatory function or regulatory penalties 
must be applied to fund the legal and regulatory operations of NSX or 
to pay restitution and disgorgement of funds intended for NSX 
customers, and may not be used to pay dividends.\101\
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    \100\ See proposed NSX By-Laws, section 10.3.
    \101\ See proposed NSX By-Laws, section 10.4.
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(vii) Restrictions on Ownership and Transfer
    Although there are no percentage-based restrictions on the 
ownership of NSX, the proposed NSX Certificate of Incorporation 
confirms that Holdings will own all of the voting stock of NSX at all 
times.\102\
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    \102\ See proposed NSX Certificate of Incorporation, Article 
Fourth. Under the current By-Laws of NSX, certificates of 
proprietary membership may be sold to a person whose application for 
proprietary membership in NSX has been approved by NSX only if the 
owner of the certificate has paid in full all obligations to the 
Exchange and certain claims of creditors who are members of the 
Exchange. In addition, a registered national securities exchange may 
purchase, hold or sell certificates of proprietary membership only 
with approval of the Board of Directors of NSX.
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(viii) Changes to Certificate of Incorporation and By-Laws
    Under the proposed NSX Certificate of Incorporation, any change to 
that document must first be approved by the NSX Board and, if required 
to be approved or filed with the Commission before it may become 
effective, cannot take effect until the procedures of the Commission 
necessary to make it effective have been satisfied.\103\
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    \103\ See proposed NSX Certificate of Incorporation, Article 
Eleventh.
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    Similarly, under the proposed NSX By-Laws, any change to that 
document that is required to be approved by or filed with the 
Commission before it may become effective cannot take effect until the 
procedures of the Commission necessary to make it effective have been 
satisfied.\104\ Changes to the NSX By-Laws as proposed may be made by 
either the stockholders of NSX or the NSX Board, except that certain 
provisions relating to the NSX Board, and to the voting of NSX 
stockholders may not be changed without the approval of the stockholder 
of NSX.\105\
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    \104\ See proposed NSX Certificate of Incorporation, Article 
Seventh.
    \105\ See proposed NSX Certificate of Incorporation, Article 
Seventh and proposed NSX By-Laws, section 8.1. Under the current By-
Laws of NSX, changes to the By-Laws may be proposed by any member of 
the Board of Directors of NSX by resolution or \1/3\ of the 
proprietary members by petition. The NSX Board then determines 
whether to approve submission of the proposed change to the 
proprietary members for their approval. In addition, consistent with 
the current By-Laws of NSX, sections 3.1(b) and 8.2 of the proposed 
NSX By-Laws permit the NSX Board to amend, repeal, and adopt new 
Rules of the Exchange.
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(c) Other Provisions in the Certificates of Incorporation and By-Laws
    The proposed Holdings By-Laws, Holdings Certificate of 
Incorporation, NSX Certificate of Incorporation, and NSX By-Laws 
contain other customary provisions of for-profit corporations, such as 
provisions relating to corporate offices and corporate purposes; \106\ 
director meetings, voting, removal, compensation and limitation of 
liability; \107\ indemnification of, and insurance for, directors, 
officers, employees and agents, and advancement of expenses related to 
defending certain actions; \108\ stock certificate procedures; \109\ 
stockholder ownership, including provisions relating to the timing and 
conduct of meetings, record dates, quorum requirements, proxies, and 
other matters; \110\ and other general provisions.\111\ These 
provisions are designed to reflect current and customary corporate 
practices.
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    \106\ See proposed NSX Certificate of Incorporation, Articles 
Second and Third, and proposed NSX By-Laws, Article II; see proposed 
Holdings Certificate of Incorporation, Articles Second and Third, 
and proposed Holdings By-Laws, Article I.
    \107\ See proposed NSX Certificate of Incorporation, Articles 
Fifth and Eighth, and proposed NSX By-Laws, Article III and Section 
7.1; see proposed Holdings Certificate of Incorporation, Articles 
Sixth and Ninth, and proposed Holdings By-Laws, Article II and 
section 7.1.
    \108\ See proposed NSX By-Laws, Article VII, and proposed 
Holdings By-Laws, Article VII. In addition, under these provisions, 
neither corporation is liable for any loss or damage sustained by a 
current or former member of NSX or ETP Holder relating to such 
person's use of the facilities of the Exchange or its subsidiaries.
    \109\ See proposed NSX By-Laws, Article IX, and proposed 
Holdings By-Laws, Article IX.
    \110\ See proposed NSX Certificate of Incorporation, Article 
Ninth, and proposed NSX By-Laws, Article IV; See proposed Holdings 
Certificate of Incorporation, Article Tenth, and proposed Holdings 
By-Laws, Article IV.
    \111\ See, for example, proposed NSX Certificate of 
Incorporation, Article Tenth, and proposed NSX By-Laws, Article XI; 
See, e.g., proposed Holdings Certificate of Incorporation, Article 
Eleventh, and proposed Holdings By-Laws, Article X.
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(2) National Market System Plans
    NSX currently is a participant in various National Market System 
(``NMS'') plans, including, but not limited to, the Consolidated Tape 
Association Plan, the Consolidated Quotation System Plan, the 
Intermarket Trading System Plan, the Intermarket Surveillance Group, 
and the Reporting Plan for Nasdaq-Listed Securities Traded on Exchanges 
on an Unlisted Trading Privileges Basis (``Nasdaq UTP'') Plan. These 
plans are joint industry plans entered into by SROs for the purpose of 
addressing last sale reporting, quotation reporting, and intermarket 
equities trading. Following the completion of the demutualization, NSX, 
in its continuing role as the SRO, would continue to serve as the 
voting member of these NMS plans, and a representative of NSX would 
continue to serve as the Exchange's representative with respect to 
dealing with these plans.
(3) Equity Trading Permits; Administrative Changes
    The proposed rule change includes proposed changes to the Rules of 
the Exchange that are necessary to implement the proposed ETP 
structure. As noted above, following NSX's demutualization, persons and 
firms who have been qualified for membership pursuant to the Exchange's 
current Rules and By-Laws and, as a result, have access to the 
Exchange's trading facilities would receive ETPs entitling them to 
maintain their trading access to NSX and would be referred to as ETP 
Holders. The Exchange proposes to replace references to ``members,'' 
``member organizations,'' and similar terms in the current Rules of the 
Exchange with references to ``ETP Holders'' and similar terms in the 
NSX Rules.
    The Exchange states that each ETP would constitute a revocable 
license allowing the holder of the permit access to the Exchange's 
trading facilities in the same manner as previously authorized for 
NSX's qualified trading members.\112\ The demutualization and the 
implementation of the use of ETPs would not change current NSX member 
access to the Exchange or their ability to execute transactions. NSX 
states that persons holding ETPs of NSX would be ``members'' of the 
Exchange for

[[Page 26164]]

purposes of the Act and, as noted above, will be characterized as ETP 
Holders subject to NSX's regulatory jurisdiction.\113\ ETP Holders 
would not have any ownership interest in NSX or in Holdings by virtue 
of their ETPs.
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    \112\ See proposed NSX Rules, Chapter II, Rules 2.1 and 2.2, and 
proposed NSX Rules, Chapter I, Rule 1.5 (definition of ``ETP'').
    \113\ See proposed NSX Rules, Chapter I, Rule 1.5 (definition of 
``ETP Holder'').
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    NSX proposes to move the provisions of the current By-Laws of NSX 
relating to members to a single chapter in the NSX Rules regarding ETP 
Holders, with certain changes based upon the fact that ETP Holders 
would be subject to modestly different application processes and would 
not have to purchase and own a certificate of proprietary 
membership.\114\ Following the demutualization, the Exchange states 
that it would require persons seeking ETPs to complete appropriate 
application materials and registration forms, satisfy regulatory 
requirements, and pay processing charges and application fees as 
designated by the Exchange. NSX states that this process of applying 
for an ETP immediately following demutualization would be substantially 
similar to the current membership application process, except that ETP 
Holders would not be required to be approved by NSX's Membership 
Committee, ETP Holders would be subject to the financial responsibility 
requirements of Rule 15c3-1 under the Act (but would not be subject to 
a separate net capital requirement), and ETP applicants would not need 
to purchase shares of either NSX or Holdings.\115\
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    \114\ NSX states that, currently, applicants for membership are 
required to purchase and own a certificate of proprietary membership 
in order to become a member of NSX. See Article II, section 5.2 of 
the current By-Laws of NSX. NSX states that all outstanding 
certificates of proprietary membership would be cancelled in 
connection with the demutualization, and no other certificates of 
proprietary membership would be issued by NSX following the 
demutualization.
    \115\ See proposed NSX Rules, Chapter II. The Exchange states 
that applicants for membership currently must purchase and own a 
certificate of proprietary membership of NSX in order to become an 
NSX member.
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    The Exchange states that, once issued, an ETP would be effective 
until voluntarily terminated by the ETP Holder or until revoked by NSX 
for, among other things, noncompliance with the NSX Rules.\116\ NSX 
would have the ability to revoke an ETP for the same reasons that it is 
currently entitled to revoke a membership.\117\ An ETP could not be 
sold, leased, or otherwise transferred.\118\ There would be nominal 
processing charges and application fees relating to the issuance of 
ETPs. In addition, ETP Holders would be subject to such fees as are 
designated by NSX or set forth in the NSX Rules.\119\
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    \116\ See proposed NSX Rules, Chapter II, Rules 2.6 and 2.7.
    \117\ See proposed NSX Rules, Chapter II, Rule 2.6.
    \118\ See proposed NSX Rules, Chapter II, Rule 2.8.
    \119\ See, generally NSX Rules, Chapter XI, Rule 11.10(B).
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    NSX also proposes to move certain other provisions of the current 
By-Laws of NSX respecting listing standards and other matters not 
relating to the Exchange's corporate governance to the NSX Rules. For 
example, the Exchange proposes to move the provisions contained in 
Article IV of the current By-Laws of NSX (relating to Securities Listed 
on the Exchange) to a new Chapter XV of the NSX Rules. NSX also 
proposes to move Rules 13.6 and 13.7 (relating to Listing Standards) to 
this new Chapter XV of the NSX Rules.\120\
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    \120\ In addition, NSX also proposes to move to the NSX Rules, 
and make technical changes to, certain provisions under the current 
By-Laws of NSX relating to Exchange Membership (Article II), Dues, 
Assessments and Other Charges (Article III), Securities Listed on 
the Exchange (Article IV), Commissions (Article XI) and Off-Exchange 
Transactions (Article XII).
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    Finally, NSX proposes to include a new Rule 2.10 that would 
prohibit, without prior Commission approval, either (i) NSX or any NSX 
affiliate from directly or indirectly acquiring or maintaining an 
ownership interest in an ETP Holder, or (ii) an ETP Holder being or 
becoming an affiliate of NSX or any affiliate of NSX. Under proposed 
Rule 2.10 the term ``affiliate'' has the meaning specified in Rule 12b-
2 of the Act. Proposed Rule 2.10 would not prohibit any ETP Holder or 
its affiliate from acquiring or holding an equity interest in Holdings 
that is permitted by the ownership and voting limitations in the 
Holdings Certificate of Incorporation, and would not prohibit an ETP 
Holder or an officer, director, manager, managing member, partner, or 
affiliate of an ETP Holder being or becoming an ETP Holder Director or 
an At-Large Director on the NSX Board, or a member of the Holdings 
Board.\121\
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    \121\ See Amendment No. 1, supra note 3.
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2. Statutory Basis
    NSX believes the proposal, as amended, is consistent with the 
requirements of the Act and the rules and regulations promulgated 
thereunder that are applicable to a national securities exchange, and 
in particular, with section 6(b) of the Act.\122\ NSX believes that the 
proposal, as amended, is consistent with section 6(b)(5) of the Act 
\123\ in that it would create a governance and regulatory structure of 
the Exchange that 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. The Exchange states that it 
remains committed to its role as a national securities exchange and 
does not believe that the proposed change to a for-profit institution 
will undermine its responsibilities for regulating its marketplace. 
Indeed, as described above, the Exchange believes that it has proposed 
specific provisions in the proposed Holdings By-Laws and the proposed 
NSX By-Laws that reinforce the ability of the Exchange to perform its 
self-regulatory functions.
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    \122\ 15 U.S.C. 78f(b)
    \123\ 15 U.S.C. 78f(b)(5).
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    Moreover, the Exchange states that it is not proposing any 
significant changes to its existing operational and trading structure 
in connection with the demutualization. Instead, NSX represents that 
the proposed rule change, as amended, primarily consists of: 
organizational changes to the NSX Articles of Incorporation and By-Laws 
reflecting the changes in governance and corporate form; and rule 
changes that are necessary to implement the new NSX ETP structure, 
which would replace the existing structure of Exchange memberships as a 
basis for trading rights. The Exchange believes that the proposed rule 
change is consistent with governance changes approved by the Commission 
for other demutualized exchanges and does not serve to erode the 
principles articulated in the Commission's recent governance 
release.\124\
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    \124\ See Securities Exchange Act Release No. 50699 (November 
18, 2004), 69 FR 71126 (December 8, 2004) (File No. S7-39-04).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes the proposed rule change, as amended, will 
impose no burden on competition that is 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 solicited or received by the Exchange on 
this proposal, as amended.

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

[[Page 26165]]

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 the 
Exchange consents, the Commission will:
    A. By order approve the proposed rule change, as amended, 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-NSX-2006-03 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NSX-2006-03. 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 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 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-NSX-2006-03 and should be submitted on or before May 24, 2006.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\125\
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    \125\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
 [FR Doc. E6-6637 Filed 5-2-06; 8:45 am]

BILLING CODE 8010-01-P