Document ID: SEC-2010-0467-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ Stock Market LLC
Posted Date: 2010-03-29T04:00Z

[Federal Register: March 29, 2010 (Volume 75, Number 59)]
[Notices]               
[Page 15480-15482]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr29mr10-107]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-61757; File No. SR-NASDAQ-2010-036)]

 
Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change 
To Clarify and Modify the Applicability of Nasdaq Rule 5615 To Exchange 
Traded Funds

March 22, 2010.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\, and Rule 19b-4 \2\ thereunder, notice is hereby given 
that on March 11, 2010, The NASDAQ Stock Market LLC (``Nasdaq'' or 
``the Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I and II below, which Items have been prepared by Nasdaq. Nasdaq 
has designated the proposed rule change as constituting a non-
controversial rule change under Rule 19b-4(f)(6) under the Act,\3\ 
which renders the proposal effective upon filing with the Commission. 
The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to clarify and modify the applicability of 
Nasdaq Rule 5615 to Exchange Traded Funds. The text of the proposed 
rule change is below. Proposed new language is in italics; proposed 
deletions are in [brackets].\4\
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    \4\ Changes are marked to the rules of The NASDAQ Stock Market 
LLC found at http://nasdaq.cchwallstreet.com.
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* * * * *
5615. Exemptions from Certain Corporate Governance Requirements
    This rule provides the exemptions from the corporate governance 
rules afforded to certain types of Companies, and sets forth the phase-
in schedules for initial public offerings, Companies emerging from 
bankruptcy and Companies transferring from other markets. This rule 
also describes the applicability of the corporate governance rules to 
controlled companies and sets forth the phase-in schedule afforded to 
Companies ceasing to be controlled companies.
    (a) Exemptions to the Corporate Governance Requirements
    (1) Asset-backed Issuers and Other Passive Issuers
    The following are exempt from the requirements relating to Majority 
Independent Board {Rule 5605(b){time} , Audit Committee {Rule 
5605(c){time} , Independent Director Oversight of Executive Officer 
Compensation {Rule 5605(d){time}  and Director Nominations {Rule 
5605(e){time} , the Controlled Company Exemption {Rule 
5615(c)(2){time} , and Code of Conduct {Rule 5610{time} :
    (A) No change.
    (B) issuers, such as unit investment trusts, including Portfolio 
Depository Receipts, which [that] are organized as trusts or other 
unincorporated associations that do not have a board of directors or 
persons acting in a similar capacity and whose activities are limited 
to passively owning or holding (as well as administering and 
distributing amounts in respect of) securities, rights, collateral or 
other assets on behalf of or for the benefit of the holders of the 
listed securities.
* * * * *
    (2)-(4) No change.
    (5) Management Investment Companies
    Management investment companies (including business development 
companies) are subject to all the requirements of the Rule 5600 Series, 
except that management investment companies registered under the 
Investment Company Act of 1940 are exempt from the Independent 
Directors requirement, the Independent Director Oversight of Executive 
Officer Compensation and Director Nominations requirements, and the 
Code of Conduct requirement, set forth in Rules 5605(b), (d) and (e) 
and 5610, respectively. In addition, management investment companies 
that are Index Fund Shares and Managed Fund Shares, as defined in Rules 
5705(b) and 5735, are exempt from the Audit Committee requirements set 
forth in Rule 5605(c), except for the applicable requirements of SEC 
Rule 10A-3.
IM-5615-4. Management Investment Companies
    Management investment companies registered under the Investment 
Company Act of 1940 are already subject to a pervasive system of 
federal regulation in certain areas of corporate governance covered by 
5600. In light of this, Nasdaq exempts from Rules 5605(b), (d), (e) and 
5610 management investment companies registered under the Investment 
Company Act of 1940. Business development companies, which are a type 
of closed-end management investment company defined in Section 2(a)(48) 
of the

[[Page 15481]]

Investment Company Act of 1940 that are not registered under that Act, 
are required to comply with all of the provisions of the Rule 5600 
Series. Management investment companies that are Index Fund Shares and 
Managed Fund Shares are exempt from the Audit Committee requirements 
set forth in Rule 5605(c), except for the applicable requirements of 
SEC Rule 10A-3.
    (b)-(c) No change.
* * * * *

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 proposing to clarify and modify the applicability of 
certain of its corporate governance requirements to exchange traded 
funds (``ETFs''). Nasdaq currently lists ETFs formed as unit investment 
trusts (``UITs'') or as management investment companies.\5\ ETFs 
organized as UITs are listed under Rule 5705(a) and called Portfolio 
Depository Receipts, while ETFs organized as management investment 
companies are listed under Rule 5705(b) and called Index Fund Shares or 
listed under Rule 5735 and called Managed Fund Shares. However, the 
exemptions available to the corporate governance requirements are not 
presently consistent among ETFs organized under these different legal 
structures.
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    \5\ Section 4 of the Investment Company Act of 1940 classifies 
investment companies in three principal classes: Face-amount 
certificate companies, UITs, and management companies. 15 U.S.C. 
80a-4. Management companies are further divided into open-end and 
closed-end companies. 15 U.S.C. 80a-5(a). All ETFs are open-end 
companies.
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    Nasdaq Rule 5615(a)(1)(B) exempts UITs from certain corporate 
governance requirements.\6\ Because Portfolio Depository Receipts are 
UITs, they are exempt from, among other things, the requirements in 
Rule 5605(b)-(e) and Rule 5610 related to majority independent board, 
audit committees, independent director oversight of executive officer 
compensation and director nominations, and the code of conduct under 
the corporate governance requirements, respectively. Nasdaq proposes to 
amend Rule 5615(a)(1)(B) to specifically add a reference to Portfolio 
Depository Receipts in order to remove any ambiguity about the 
applicability of these exemptions to Portfolio Depository Receipts.
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    \6\ Specifically, Rule 5615(a)(1)(B) exempts ``issuers, such as 
unit investment trusts, that are organized as trusts or other 
unincorporated associations that do not have a board of directors or 
persons acting in a similar capacity and whose activities are 
limited to passively owning or holding (as well as administering and 
distributing amounts in respect of) securities, rights, collateral 
or other assets on behalf of or for the benefit of the holders of 
the listed securities.''
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    Nasdaq Rule 5615(a)(5) and IM-5615-4 grant exemptions for ETFs that 
are structured as management investment companies from the requirements 
of Rule 5605(b) (majority independent board), Rules 5605(d) and (e) 
(independent director oversight of executive officer compensation and 
director nominations), and Rule 5610 (code of conduct). Unlike Rule 
5615(a)(1), Rule 5615(a)(5) does not include an exemption from Rule 
5605(c), relating to Nasdaq's audit committee requirements. As such, 
ETFs that are formed as management investment companies and listed as 
Index Fund Shares or Managed Fund Shares are currently subject to the 
audit committee requirements, whereas ETFs that are formed as UITs and 
listed as Portfolio Depository Receipts are not subject to those 
requirements.
    Nasdaq proposes to expand the exemption in Rule 5615(a)(5) and IM-
5615-4 to also exempt ETFs that are formed as management investment 
companies from most of the audit committee requirement of Rule 5605(c), 
thereby largely eliminating this difference.\7\ Notwithstanding this 
proposed change, one difference will remain: ETFs formed as management 
investment companies must comply with the applicable provisions of SEC 
Rule 10A-3 of the Securities Exchange Act of 1934 \8\ (``SEC Rule 10A-
3'') and the proposed rule change will specifically state that 
requirement. This proposed change will conform Nasdaq's treatment of 
these ETFs that are management investment companies with that of other 
markets.\9\
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    \7\ Management investment companies other than ETFs must still 
comply with the audit committee requirement of Rule 5605(c) and SEC 
Rule 10A-3.
    \8\ 17 CFR 240.10A-3.
    \9\ NYSEArca Equities Rule 5.3, in part, details specifically 
which corporate governance requirements apply to ``special purpose 
companies.'' A special purpose company is defined to include a 
company listed under NYSEArca Equities Rule 5.2(j)(3), which 
contains NYSEArca's provisions for listing ETFs, called Investment 
Company Units, which include registered investment companies 
organized as UITs or open-end management investment companies. See 
also NYSE Listed Company Manual Section 303A.00, which similarly 
provides that the NYSE's corporate governance requirements contained 
in Section 303A do not apply to securities listed under Section 
703.16, relating to Investment Company Units, which can be organized 
as unit investment trusts or open-end management investment 
companies.
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    Moreover, Nasdaq believes that it is appropriate to make these 
changes because, as stated in IM-5615-4, these entities are subject to 
the Investment Company Act of 1940 and the pervasive system of federal 
regulation. This includes, among other things, assigning important 
duties of investment company governance, such as approval of investment 
advisory contracts, to independent directors.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \10\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \11\ in particular, in that it is designed to 
promote just and equitable principles of trade, to remove impediments 
to and perfect the mechanism of a free and open market and a national 
market system, and, in general to protect investors and the public 
interest. The proposed change is designed to harmonize the 
applicability of Nasdaq's corporate governance rules to various types 
of ETFs and will treat similarly situated companies in the same manner.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    Nasdaq does not believe that the proposed rule change will result 
in any 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

    Written comments were neither solicited nor received.

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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time

[[Page 15482]]

as the Commission may designate, if consistent with the protection of 
investors and the public interest, it has become effective pursuant to 
Section 19(b)(3)(A) of the Act \12\ and Rule 19b-4(f)(6)(iii) 
thereunder.\13\
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    \12\ 15 U.S.C. 78s(b)(3)(A).
    \13\ 17 CFR 240.19b-4(f)(6)(iii). In addition, Rule 19b-
4(f)(6)(iii) requires that a self-regulatory organization submit to 
the Commission written notice of its intent to file the proposed 
rule change, along with a brief description and text of the proposed 
rule change, at least five business days prior to the date of filing 
of the proposed rule change, or such shorter time as designated by 
the Commission. The Commission notes that Nasdaq satisfied the five-
day pre-filing notice requirement.
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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.
    Normally, a proposed rule change filed under 19b-4(f)(6) may not 
become operative prior to 30 days after the date of filing. However, 
Rule 19b-4(f)(6)(iii) \14\ permits the Commission to designate a 
shorter time if such action is consistent with the protection of 
investors and the public interest. Nasdaq has requested that the 
Commission waive the 30-day operative delay. In its filing, Nasdaq 
requested the waiver in order to provide immediate clarity to its rules 
and to eliminate any disparity between its rules and those of other 
exchanges with similar exemptions that have been previously approved by 
the Commission.
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    \14\ 17 CFR 240.19b-4(f)(6)(iii).
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    The Commission believes that waiver of the 30-day operative period 
is consistent with the protection of investors and the public interest. 
The proposed rule change will clarify an ambiguity in Nasdaq's rules, 
which should benefit investors, Nasdaq members, and regulators. In 
addition, the Commission notes that, as Nasdaq has pointed out, the 
changes proposed in this filing would conform certain of Nasdaq's 
corporate governance standards to those of other exchanges.\15\ 
Accordingly, the Commission designates the proposal to be operative 
upon filing with the Commission.\16\
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    \15\ See supra, note 9.
    \16\ For the purposes only of waiving the 30-day operative 
delay, the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-NASDAQ-2010-036 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NASDAQ-2010-036. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/
rules/sro.shtml). Copies of the submission, all subsequent amendments, 
all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. 552, will be available for Web site 
viewing and printing in the Commission's Public Reference Room, 100 F 
Street, NE., Washington, DC 20549-1090 on official business days 
between the hours of 10 a.m. and 3 p.m. 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-
NASDAQ-2010-036 and should be submitted on or before April 19, 2010.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-6838 Filed 3-26-10; 8:45 am]
BILLING CODE 8011-01-P