Document ID: SEC-2010-0918-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE Arca, Inc.
Posted Date: 2010-06-24T04:00Z

[Federal Register: June 24, 2010 (Volume 75, Number 121)]
[Notices]               
[Page 36136-36138]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr24jn10-88]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-62304; File No. SR-NYSEArca-2010-31]

 
Self-Regulatory Organizations; NYSE Arca, Inc.; Order Approving 
Proposed Rule Change To Amend NYSE Arca Rule 3.3(a) and Section 401(a) 
of the Exchange's Bylaws To Eliminate the Exchange's Audit Committee, 
Compensation Committee, and Regulatory Oversight Committee

June 16, 2010.
    On April 20, 2010, NYSE Arca, Inc. (``NYSE Arca'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission'') 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to 
amend NYSE Arca Rule 3.3(a) and Section 401(a) of the Exchange's Bylaws 
to eliminate the Exchange's Audit Committee, Compensation Committee, 
and Regulatory Oversight Committee. The proposed rule change was 
published for comment in the Federal Register on May 11, 2010.\3\ The 
Commission received no comments regarding the proposal. This order 
approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 62032 (May 4, 2010), 
75 FR 26304 (``Notice'').
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I. Description of the Proposed Rule Change

    Currently, the Board of Directors of the Exchange and its ultimate 
parent company, NYSE Euronext, each maintain its own Audit Committee 
and Compensation Committee. As more fully discussed in the Notice, the 
Exchange states that it has found that the work of these committees 
overlaps substantially.\4\ As a result, the Exchange has proposed to 
revise its Bylaws to allow for the elimination of its Audit and 
Compensation Committees. In addition, the Exchange has proposed to 
eliminate its Regulatory Oversight Committee (``ROC''), and in lieu 
thereof, provide that the Board of NYSE

[[Page 36137]]

Regulation, Inc. (``NYSER'') \5\ and the Board of the Exchange each 
will exercise a portion of the current responsibilities of the ROC, 
with the Board of the Exchange retaining ultimate legal responsibility 
for the regulation of its permit holders \6\ and its market.\7\
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    \4\ See Notice, supra note 3.
    \5\ NYSER is a not-for-profit indirect subsidiary of NYSE 
Euronext.
    \6\ Permit holders at the Exchange are ``members'' of the 
Exchange as that term is defined in Section 3 of the Act.
    \7\ These arrangements are set forth in various regulatory 
services agreements. See infra note 16 and accompanying text.
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II. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities exchange.\8\ 
In particular, the Commission finds that the proposed rule change is 
consistent with Section 6(b)(1) of the Act,\9\ which requires a 
national securities exchange to be so organized and have the capacity 
to carry out the purposes of the Act and to comply, and to enforce 
compliance by its members and persons associated with its members, with 
the provisions of the Act. The Commission also finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act,\10\ in that 
it is designed, among other things, to prevent fraudulent and 
manipulative acts and practices, 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 Commission 
has previously approved a structure in which certain committees of the 
Board of NYSE Euronext, including its Audit and Compensation 
Committees, were authorized to perform functions for subsidiaries of 
NYSE Euronext, including the New York Stock Exchange, LLC 
(``NYSE''),\11\ and NYSE Amex, Inc. (``NYSE Amex'').\12\ The Commission 
has also previously approved a structure for NYSE Amex in which the 
Board of NYSER and the Board of NYSE Amex each exercise a portion of 
the Regulatory Oversight Committee responsibilities for NYSE Amex, with 
NYSE Amex retaining ultimate legal responsibility for the regulation of 
its permit holders and its market.\13\
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    \8\ In approving this proposed rule change, the Commission notes 
that it has considered the proposed rule's impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f).
    \9\ 15 U.S.C. 78f(b)(1).
    \10\ 15 U.S.C. 78f(b)(5).
    \11\ See Securities Exchange Act Release No. 55293 (February 14, 
2007), 72 FR 8033 (February 22, 2007) (SR-NYSE-2006-120).
    \12\ See Securities Exchange Act Release No. 58673 (September 
29, 2008), 73 FR 57707 (October 3, 2008) (SR-Amex-2008-62, SR-NYSE-
2008-60) (``NYSE Amex Approval Order'').
    \13\ See id.
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    The NYSE Arca Audit Committee. Under current Exchange Rule 
3.3(a)(3)(B), the primary functions of the NYSE Arca Audit Committee 
are (i) to conduct an annual review with the independent auditors, to 
determine the scope of their examination and the cost thereof; (ii) to 
periodically review with the independent auditors and the internal 
auditor the Exchange's internal controls and the adequacy of the 
internal audit program; (iii) to review the annual reports submitted 
both internally and externally, and take such action with respect 
thereto as it may deem appropriate, and (iv) to recommend to the Board 
of NYSE Arca independent public accountants as auditors of the Exchange 
and its subsidiaries.
    The NYSE Euronext Audit Committee is responsible under its charter 
for assessing the effectiveness of the internal audit function and 
reviewing with management and the independent auditor any major issues 
as to the adequacy of NYSE Euronext's internal risk management and 
internal controls, as well as meeting to review and discuss with 
management and the independent auditor NYSE Euronext's annual audited 
financial statements, quarterly financial statements prior to the 
filing of Form 10-Q, and significant financial reporting issues and 
judgments made in connection with the preparation of the financial 
statements.
    In connection with this proposal, the Exchange represents that: (i) 
The specific responsibilities of the NYSE Euronext Audit Committee, as 
well as numerous others in its charter relating to oversight of both 
the independent and internal auditors, financial statement and 
disclosure matters, and corporate oversight, result in the 
responsibilities of the NYSE Arca Audit Committee being fully 
duplicated by the responsibilities of the NYSE Euronext Audit 
Committee; (ii) the NYSE Euronext Audit Committee will continue to be 
composed at all times of independent directors and will continue to 
review the financial condition of the Exchange as part of its oversight 
of the financial processes of NYSE Euronext and of each of its 
consolidated subsidiaries; (iii) NYSER has broad authority to oversee 
the regulatory activities of the Exchange and the other self-regulatory 
organizations whose ultimate parent is NYSE Euronext, through delegated 
authority and regulatory services agreements; (iv) it is the practice 
of NYSE Euronext's Global Risk and Audit Services Department (``RAS''), 
which performs internal audit functions, to report to the NYSER Board 
on all internal audit matters relating to the Exchange's regulatory 
responsibilities, and to ensure that NYSER has the appropriate 
authority to oversee RAS's activities with respect to the Exchange's 
regulatory responsibilities pursuant to the provisions of the RSA 
between the Exchange and NYSER; (v) RAS's written procedures will be 
amended to stipulate that the NYSER Board of Directors may, at any 
time, request that RAS conduct an audit of a matter of concern to it 
and report the results of the audit both to the NYSER Board of 
Directors and the NYSE Euronext Audit Committee; (vi) the chief 
regulatory officer of the Exchange would be in attendance at any 
meeting of the NYSER Board of Directors at which the results of any 
such audit would be reported by RAS; and (vii) the Exchange retains the 
authority to direct NYSER to request that RAS conduct such an audit of 
a matter of concern to it.
    The Commission notes that the proposed elimination of the NYSE Arca 
Audit Committee is comparable to a structure for NYSE and NYSE Amex 
that the Commission has previously considered and approved.\14\ The 
Commission finds that the proposed elimination of the NYSE Arca Audit 
and Compensation committees is consistent with the Act.
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    \14\ See supra notes 11 and 12.
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    NYSE Arca Compensation Committee. The Exchange also proposes to 
eliminate its Compensation Committee, and to prescribe that the 
functions of that committee be performed by the NYSE Euronext Human 
Resources and Compensation Committee. Pursuant to current Exchange Rule 
3.3(a)(4)(B), the NYSE Arca Compensation Committee is required to (i) 
review and approve corporate goals and objectives relevant to the 
Exchange CEO's compensation; (ii) evaluate the CEO's performance in 
light of those goals and objectives; (iii) set the CEO's compensation 
level based on this evaluation; and (iv) make recommendations to the 
Exchange's Board of Directors with respect to the design of incentive 
compensation and equity-based plans. As more fully set forth in the 
Notice, the Exchange represents that the NYSE Arca Compensation 
Committee's assigned responsibilities with respect to

[[Page 36138]]

compensation and personnel matters overlap with the broader mandate of 
the NYSE Euronext Human Resources and Compensation Committee. The 
Commission notes that the proposed elimination of the NYSE Arca 
Compensation Committee is comparable to a structure for NYSE and NYSE 
Amex that the Commission has previously considered and approved.\15\ 
The Commission finds that the proposed elimination of the NYSE Arca 
Compensation Committees is consistent with the Act.
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    \15\ See supra note 12.
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Elimination of NYSE Arca Regulatory Oversight Committee
    The Exchange also proposes to eliminate its ROC, and in lieu 
thereof, provide for the exercise of the current formal 
responsibilities of the ROC to be divided between the NYSER Board and 
the Exchange's Board. Currently, the ROC is responsible for ensuring 
(i) the independence of Exchange regulation; (ii) adequate resources 
for the Exchange to properly fulfill its self-regulatory obligations; 
and (iii) that Exchange management fully supports the execution of the 
regulatory process.
    In support of its proposal to eliminate the ROC, the Exchange 
represents that it has previously entered into an RSA with NYSER to 
perform all of the Exchange's regulatory functions on the Exchange's 
behalf; that the Financial Industry Regulatory Authority (``FINRA'') 
performs some of the regulatory functions contracted out to NYSER 
pursuant to a separate multi-party regulatory services agreement with 
FINRA; \16\ and that these regulatory contractual arrangements closely 
parallel the regulatory arrangements for NYSE Amex that the Commission 
reviewed and approved in the NYSE Amex Approval Order.\17\ The Exchange 
states that the proposed elimination of its ROC will result in 
regulatory arrangements similar to those approved for NYSE Amex. In 
addition to the foregoing, the Exchange specifically represents that 
(i) NYSER will provide a comparable level of independence as that of a 
ROC; (ii) NYSE Euronext has agreed to provide adequate funding to NYSE 
Regulation to conduct its regulatory activities with respect to the 
Exchange; and (iii) notwithstanding its regulatory agreements, the 
Exchange retains ultimate legal responsibility for the regulation of 
its permit holders and its market and has full authority to take action 
to assure that its regulatory responsibilities are met. Acknowledging 
that it retains ultimate legal responsibility, the Exchange has further 
stated that its Board of Directors will directly assume the ROC's 
current formal responsibility to ensure that Exchange management fully 
supports the execution of the regulatory process and that it retains 
the authority to direct NYSER and FINRA to take any action necessary to 
fulfill the Exchange's statutory and self-regulatory obligations.
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    \16\ The Commission notes that on June 14, 2010, NYSE, NYSER, 
NYSE Amex, and NYSE Arca (``NYSE Parties'') entered into a new 
multi-party regulatory services agreement with FINRA, pursuant to 
which FINRA will perform additional regulatory functions on behalf 
of the NYSE Parties, including market surveillance and enforcement 
activities. See http://www.nyse.com/press/1276509404802.html. See 
also June 16, 2010 e-mail correspondence from William Love, Chief 
Counsel, NYSE Euronext, to Heidi Pilpel, Special Counsel, 
Commission.
    \17\ See supra note 12.
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    The Commission notes that the proposed elimination of the NYSE Arca 
ROC is comparable to the structure that the Commission approved in the 
NYSE Amex Approval Order.\18\ The Commission finds that the proposed 
elimination of the NYSE Arca ROC is consistent with the Act.
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    \18\ See supra note 12.
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III. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\19\ that the proposed rule change (SR-NYSEArca-2010-31) be, and it 
hereby is, approved.
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    \19\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-15285 Filed 6-23-10; 8:45 am]
BILLING CODE 8010-01-P