Document ID: SEC-2009-0502-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; NASDAQ OMX PHLX, Inc.; Notice of Filing of a Proposed Rule Change and Amendment No. 1 Thereto To Amend the By-Laws, Rules and Option Floor Procedure Advices of NASDAQ OMX PHLX, Inc.
Posted Date: 2009-04-09T04:00Z

[Federal Register: April 9, 2009 (Volume 74, Number 67)]
[Notices]               
[Page 16249-16255]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr09ap09-117]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59697; File No. SR-Phlx-2009-23]

 
Self-Regulatory Organizations; NASDAQ OMX PHLX, Inc.; Notice of 
Filing of a Proposed Rule Change and Amendment No. 1 Thereto To Amend 
the By-Laws, Rules and Option Floor Procedure Advices of NASDAQ OMX 
PHLX, Inc.

April 2, 2009.
    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 March 13, 2009, NASDAQ OMX PHLX, Inc. (``Phlx'' or the ``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 March 25, 2009, Phlx filed 
Amendment No. 1 to the proposed rule change. 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.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend its By-Laws, Rules of the Board of 
Governors and Options Rules (the two sets of rules are together known 
as the ``Rules''), and Option Floor Procedure Advices (``OFPAs'' or 
``Advices'') \3\ to make changes to certain standing committees and 
processes of the Exchange. Specifically, the Exchange proposes to 
eliminate: (a) The Admissions Committee; (b) the Options Allocation, 
Evaluation and Securities Committee; (c) the Options Committee; (d) the 
Foreign Currency Options Committee; and (e) the Weekly Bulletin. 
Additionally, the Exchange proposes to: (a) make the Finance Committee 
optional; (b) change the structure of the Business Conduct Committee 
and eliminate reference to the Hearing Officer; and (c) authorize 
action in the event of an emergency or extraordinary market 
conditions.\4\
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    \3\ OFPAs are discussed in Rule 970, which sets forth the 
criteria for the imposition of a fine (not to exceed $5,000) on any 
member, member organization, or any partner, officer, director or 
person employed by or associated with any member or member 
organization, for any violation of an OFPA, which violation the 
Exchange determined is minor in nature (known as the ``Minor Rule 
Plan''). Such a fine would be imposed in lieu of commencing a 
``disciplinary proceeding'' as that term is used in Exchange Rules 
960.1-960.12, and would be subject to Rule 19d-1 under the Act.
    \4\ Certain changes proposed in the present filing may be 
affected by SR-Phlx-2009-17, which is pending. See Securities 
Exchange Act Release No. 59538 (March 9, 2009), 74 FR 11152 (March 
16, 2009). We would amend the present filing if necessary upon 
approval of SR-Phlx-2009-17.
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    The text of the proposed rule change is available on the Exchange's 
Web site at http://nasdaqomxphlx.cchwallstreet.com/NASDAQOMXPHLX/
Filings/, at the principal office of the Exchange, and at the 
Commission's Public Reference Room.

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

    In its filing with the Commission, 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. 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.

[[Page 16250]]

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

1. Purpose
    The Exchange was recently acquired by The NASDAQ OMX Group, Inc. 
(``NASDAQ OMX'').\5\
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    \5\ On July 24, 2008, NASDAQ OMX acquired all of the common 
stock of the Exchange, which became a wholly owned subsidiary of 
NASDAQ OMX. The Exchange has continued to operate as a separate 
self-regulatory organization (``SRO''). See Securities Exchange Act 
Release No. 58179 (July 17, 2008), 73 FR 42874 (July 23, 2008) (SR-
Phlx-2008-31). See also Securities Exchange Act Release No. 58183 
(July 17, 2008), 73 FR 42850 (July 23, 2008) (SR-NASDAQ-2008-035). 
The Exchange recently changed its name to NASDAQ OMX PHLX. See 
Securities Exchange Act Release No. 58380 (August 18, 2008), 73 FR 
49728 (August 22, 2008) (SR-Phlx-2008-61).
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    The purpose of the proposed rule change is to streamline the 
governance of the Exchange by eliminating and/or consolidating certain 
standing committees of the Board to make the Exchange's governance 
process more similar to that of NASDAQ OMX's other U.S. SROs, The 
NASDAQ Stock Market LLC (the ``NASDAQ Stock Market'') and NASDAQ OMX 
BX, Inc. (``BX''). The duties of the eliminated committees will 
generally be administered by Exchange staff or other Board committees. 
The Exchange also proposes to codify the ability of the Exchange to 
take emergency action, change how information is provided to Exchange 
membership, and update the functioning of the Exchange's disciplinary 
committee.
    The Exchange proposes to: Eliminate the Admissions Committee and 
Allocation, Evaluation and Securities Committee; consolidate the 
Options Committee and the Foreign Currency Options Committee into the 
Quality of Markets Committee; and eliminate the use of the Weekly 
Bulletin. The Exchange also proposes to: Change the membership 
structure of the Business Conduct Committee and eliminate the Hearing 
Officer; make the Finance Committee optional at the discretion of the 
Board; and authorize the Chief Executive Officer and the President of 
the Exchange to take action in the event of an emergency or 
extraordinary market conditions. As a result of this filing, eleven 
standing committees of the Exchange's Board would be reduced to seven, 
one of which would be optional at the discretion of the Board.\6\
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    \6\ The following Exchange Committees would remain after this 
filing: Executive; Audit; Business Conduct; Compensation; 
Nominating, Elections and Governance; Quality of Markets; and 
Finance (optional). But see Securities Exchange Act Release No. 
59538 (March 9, 2009) (SR-Phlx-2009-17), which discusses, among 
other things, renaming of the Nominating, Elections and Governance 
Committee.
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    The Exchange believes that its proposal should considerably 
streamline Exchange governance to the benefit of the Exchange and its 
membership. Moreover, the Exchange believes that its proposal is 
conducive to the objective of Phlx, BX, and the NASDAQ Stock Market 
having similar by-laws and/or rules where practical.

Admissions Committee

    The Exchange proposes to amend its By-Law Article X, Section 10-1, 
Standing Committees, which lists all Exchange standing committees, to 
eliminate the Admissions Committee. The Exchange proposes to delete its 
By-Law Article X, Section 10-6, Admissions Committee, which sets forth 
the duties and functions of the Admissions Committee,\7\ and transfer 
those duties to the Exchange's Membership Department in proposed new 
Rule 900.1, General Powers and Duties of Membership Department. The 
Exchange proposes to delete By-Law Article XII, Section 12-5, 
Application, which sets forth the duties and functions of the 
Admissions Committee in respect of applications for permits and 
admission as foreign currency options (``FCO'') participants,\8\ and 
transfer the relevant provisions of Section 12-5 to the Membership 
Department in new Rule 900.2, Membership Applications.
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    \7\ Pursuant to By-Law Article X, Section 10-6, the Admissions 
Committee has jurisdiction over, among other things: the review of 
applications of non-members seeking to become members, member 
organizations, permit holders, foreign currency options 
participants, or foreign currency options participant organizations; 
changes to membership affiliation and status; determinations 
regarding affiliations of existing members and member organization 
firms and determinations regarding inactive nominees [sic]; and 
qualification, revocation and reinstatement of permits and foreign 
currency options participations.
    \8\ By-Law Article XII, Section 12-5 describes the processing of 
applications for permits or admission as FCO participants and 
indicates, among other things, that: Exchange staff (the Membership 
Services Department) initially receives, reviews and makes 
recommendations regarding such applications; the Admissions 
Committee makes the final application determinations; and applicant 
names are posted for a period of seven days in the Weekly Bulletin 
and on the Web site of the Exchange.
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    Over the years, Exchange staff has been involved in virtually all 
aspects of the Exchange's admission and membership process, including 
assisting the Admissions Committee in the review of membership 
applications, renewals and requests for contraction and expansion of 
membership privileges, and communicating with the Admissions Committee 
and Phlx membership regarding admission and membership. The Exchange 
believes that staff time allocated to communicating with the Admissions 
Committee, organizing its meetings, and communicating on its behalf can 
be better utilized and redirected to performance of admission and 
membership-related functions by the new Membership Department, which is 
currently known as the Membership Services Department. The Exchange 
therefore proposes to have the Membership Department perform the 
functions of the Admissions Committee.
    The Exchange proposes to expressly provide that the Membership 
Department will administer the Exchange rules that are currently 
administered by the Admissions Committee.\9\ The Exchange also proposes 
to delete all references to the Admissions Committee, clarify 
references to the Membership Department, and generally make changes in 
a variety of by-laws and rules that correspond to by-law amendments 
discussed herein.\10\
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    \9\ See Rule 900 (indicating that the Membership Department will 
administer Rules 901 to 949 and 971 and 972, inclusive).
    \10\ ``Membership Department'' in By-Law Article I, Section 1-
1(mm) replaces the Exchange's Membership Services Department. See 
also By-Law Article I, Section 1-1, Article IV, Section 4-4, Article 
V, Section 5-8, Article XI, Section 11-1, Article XIII, Sections 13-
2, 13-6, 13-8, Article XIV, Section 14-5, Article XV, Sections 15-1, 
15-2, 15-3, 15-6, 15-7, 15-8, 15-10 Article XVII, Sections 17-1, 17-
2, 17-3, 17-4, 17-5, and Article XXVII, Section 27-4; and Rules 1, 
173, 600, 601, 602, 901, 902, 904, 906, 907, 909, 921, 922, 930, 
949, and 1090.
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    Proposed new Rule 900.1, which is based on deleted By-Law Article 
X, Section 10-6, indicates that the Membership Department will be in 
charge of the membership and admissions processes at the Exchange. As 
such, the Membership Department will have jurisdiction over, among 
other things, admission, denial, reinstatement, and revocation of 
membership to the Exchange; supervision of members, membership 
organizations and partnership arrangements; qualification, 
registration, and determinations regarding affiliations of entities as 
foreign currency options participants; and rights and privileges of 
permit holders.\11\
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    \11\ The Exchange proposes to transfer from By-Law Article X, 
Section 10-6 to new Rule 900.1 only those substantive areas that are 
relevant to the structure of the admissions and membership process 
overseen by the Membership Department. For example, the provision in 
Section 10-6 that the Business Conduct Committee share jurisdiction 
over the revocation of permits and foreign currency options 
participations in connection with disciplinary matters with the 
Admissions Committee, and references to the Admissions Committee are 
not transferred to Rule 900.1.

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[[Page 16251]]

    Proposed new Rule 900.2, which is based on deleted By-Law Article 
XII, Section 12-5, indicates that applicants for a permit or admission 
as a member or as a foreign currency options participant shall initiate 
the procedure by filing an application with the Membership Department 
in such form as prescribed by the department. All applications will be 
reviewed and acted on by the Membership Department. Should the 
Membership Department not approve an application, it shall notify the 
applicant in writing of the specific grounds for denial.\12\
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    \12\ The Exchange proposes to transfer from deleted By-law 
Article XII, Section 12-5 to new Rule 900.2 only those substantive 
areas that are relevant to the processing of applications. 
Provisions in Section 12-5 regarding posting of applicant names for 
a seven day period in the Weekly Bulletin and on the Exchange's Web 
site; references to the Admissions Committee; and references to the 
Demutualization Merger, see Securities Exchange Act Release No. 
49098 (January 16, 2004), 69 FR 3974 (January 27, 2004) (SR-Phlx-
2003-73), for example, are not transferred to Rule 900.2.
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    An applicant that is not approved has a right to an appeal hearing 
pursuant to By-Law Article XI. The process of appealing from standing 
committee decisions is set forth in By-Law Article XI, Section 11-1(a), 
which indicates that appeals from standing committee decisions are 
initiated by filing with the Secretary of the Exchange a notice of 
appeal within 10 days after the decision has been rendered. The 
Exchange proposes to add the Membership Department into By-Law Article 
XI, Section 11-1(a) to permit appeals from Membership Department 
decisions. The Exchange proposes to similarly add the Membership 
Department into By-Law Article XI, Section 11-1(c) to indicate that 
appeals from decisions of the Membership Department will be heard by a 
special committee of the Board composed of three Governors, at least 
one of whom is an Independent Governor (the ``Special Committee''). A 
decision of the Special Committee is not appealable to the Board.
    The Exchange believes that the elimination of the Admissions 
Committee and transfer of its duties to the Membership Department will 
begin to align Exchange admissions and membership processing more 
closely to that of NASDAQ OMX and/or the NASDAQ Stock Market.\13\
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    \13\ The NASDAQ Stock Market does not have an Admissions 
Committee. See NASDAQ Stock Market By-Law (``NASDAQ By-Law'') 
Article III, Sections 5 and 6. Membership application processing and 
decisions regarding NASDAQ membership are handled by staff. See 
NASDAQ Stock Market Rule (``NASDAQ Rule'') 1000 et seq.
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Weekly Bulletin

    The Exchange proposes to eliminate publication of its Weekly 
Bulletin (the ``Bulletin''), which contains, among other things, 
changes in permit holder and member organization status and 
applications made to the Exchange.\14\ The Bulletin invites readers to 
report information regarding applications and applicants. The current 
admissions process requires that, if the Admissions Committee votes 
favorably regarding a request by an applicant, his or her name has to 
be posted for a period of 7 days in the Bulletin and on the Exchange's 
Web site. If during this time an objection to provision of a permit or 
application is received by the Admissions Committee (the ``objection 
process''), it must reconsider its favorable vote.\15\
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    \14\ The Bulletin, which is currently distributed in electronic 
form, also provides notice of certain matters such as, for example, 
the bid, ask and last sales prices for Exchange memberships and 
NASDAQ OMX Futures Exchange, Inc. (``NFX'') (formerly Philadelphia 
Board of Trade or ``PBOT'') shares; and disciplinary decisions 
issued and sanctions imposed by the Exchange's Business Conduct 
Committee. See Supplementary Material to By-Law Article XVIII, 
Section 18-2 for Board policy of publicizing fines, censures and 
disciplinary actions regarding members and member organizations. The 
Exchange intends to provide this information on its Web site.
    \15\ See By-Law Article XII, Section 12-5. See also By-Law 
Article XV, Section 15-1 regarding a 7 day notice in the Bulletin; 
and By-Law Article XVII, Section 17-5 regarding a 14 day notice in 
the Bulletin prior to the Admission Committee considering an 
application. See also By-Law Article XV, Section 15-2 regarding a 7 
day transfer notice.
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    The Exchange believes that admission and membership decisions can 
be administered by the Exchange. The Exchange therefore proposes to 
eliminate the objection process and notification in the Bulletin and/or 
on its Web site. The Exchange intends to instead provide notification 
regarding membership approvals on the Exchange's Web site.
    The Exchange believes that the Bulletin, which at one time served 
as a predominant means of communication regarding exchange matters, is 
no longer a viable means of communication in today's fast-paced, 
electronic world. As such, the Exchange proposes to terminate 
publication of the Bulletin and to provide disciplinary and other 
relevant information on its Web site.

Allocation Committee

    The Exchange proposes to amend its By-Law Article X, Section 10-1, 
Standing Committees, to eliminate the Options Allocation, Evaluation 
and Securities Committee (the ``Allocation Committee''). The Exchange 
proposes to delete its By-Law X, Section 10-7, Options Allocation, 
Evaluation and Securities Committee, which sets forth the duties and 
functions of the Allocation Committee.\16\ The relevant functions and 
duties of the committee will be performed by Exchange staff.
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    \16\ Pursuant to By-Law Article X, Section 10-7, the Allocation 
Committee has jurisdiction over, among other things: the appointment 
or approval of specialists, Streaming Quote Traders (``SQTs'') and 
Remote Streaming Quote Traders (``RSQTs''); allocation, retention 
and transfer of privileges to deal in options on Exchange trading 
floors; evaluation of the performance of specialists, SQTs and 
RSQTs; and administration of the 500 series of Exchange rules.
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    Similar to Exchange staff involvement with the admission and 
membership process, Exchange staff has been involved in all aspects of 
the Exchange's allocation process through its work with the Allocation 
Committee. The time allocated by Exchange staff to communicating with 
and on behalf of the Allocation Committee and organizing its meetings 
can be better utilized and redirected to performance of allocation-
related functions upon elimination of the Allocation Committee.\17\ In 
addition, the allocation process often necessitates a fast turnaround, 
such that calling committee meetings, particularly during trading 
hours, is often challenging. Thus, the Exchange believes that allowing 
Exchange staff to perform the functions of the Allocation Committee 
should significantly improve the flow and efficiency of the allocation 
process.
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    \17\ The Exchange's Equity Allocation, Evaluation and Securities 
Committee was eliminated with the implementation of the Exchange's 
electronic equity trading system (XLE). See Securities Exchange Act 
Release No. 54329 (August 17, 2006), 71 FR 50482 (August 25, 2006) 
(SR-Phlx-2006-43). XLE is no longer operating.
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    With the elimination of the Allocation Committee, the Exchange 
proposes to expressly state that the Exchange will administer the rules 
that are currently administered by the Allocation Committee.\18\ The 
Exchange also proposes to delete all references to the Allocation 
Committee, clarify references to the Exchange or its staff, and 
generally make changes in a variety of by-laws, rules, and OFPAs that 
correspond to by-law amendments discussed herein.\19\
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    \18\ See Rule 500 (indicating that Rules 500 through 599 will be 
administered by the Exchange). Unlike the transfer of duties from 
the Admissions Committee to a specific Membership Department, the 
transfer of duties from the Allocation Committee is generally to the 
``Exchange.'' In addition to the rules, the admission process is 
described by the Exchange on its Web site.
    \19\ See By-Law Article XI, Section 11-1 and By-Law Article 
XXVII, Sections 27-3 and 27-4 [sic]; Rules 501, 505, 506, 507, 508, 
510, 511, 513, 515, 602, and 1014; and OFPA B-6. See also Rules 525 
and 526 (deleting rules regarding Allocation Committee authority), 
and 509 (deleting rule referring to outdated subcommittee of the 
Allocation Committee).
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    The Exchange believes that the elimination of the Allocation 
Committee

[[Page 16252]]

and transfer of its duties to the Exchange should help make the 
Exchange's allocations structure more similar to that of the NASDAQ 
Stock Market.\20\
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    \20\ The NASDAQ Stock Market does not currently have a Board 
committee similar to the Allocation Committee. See NASDAQ Stock 
Market By-Law Article III, Sections 5 and 6.
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Options Committee and Foreign Currency Options Committee

    The Exchange is eliminating the Options Committee and Foreign 
Currency Options Committee (the ``FCO Committee''), which are now two 
separate Board committees, and combining them into the Quality of 
Markets Committee. In particular, the Exchange proposes to amend its 
By-Law Article X, Section 10-1, Standing Committees to eliminate the 
Options Committee and the FCO Committee from the list of Exchange 
committees. The Exchange proposes to delete its By-Law Article X, 
Section 10-20, Options Committee, and its By-Law Article X, Section 10-
17, Foreign Currency Options Committee, setting forth the duties and 
functions of the committees.\21\ The Exchange then proposes to fold 
these two committees into the Quality of Markets Committee (the 
``QMC'') by amending the language of By-Law Article X, Section 10-21, 
Quality of Markets Committee, so that the duties and functions of the 
Exchange's QMC would be analogous to those of the NASDAQ Stock Market 
QMC.\22\ Specifically, the new QMC would have the following functions 
respecting index, foreign currency, and equity options as well as 
equities: \23\ to provide advice and guidance to the Board on issues 
relating to the fairness, integrity, efficiency, and competitiveness of 
the information, order handling, and execution mechanisms of the 
Exchange from the perspective of investors (both individual and 
institutional), retail firms, specialist and registered options trader 
firms, and other participants of the Exchange; and to advise the Board 
with respect to national market system plans and linkages between the 
facilities of the Exchange and other markets.
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    \21\ Pursuant to By-Law Article X, Section 10-20, the Options 
Committee currently has jurisdiction to, among other things: 
supervise the dealings of members and market makers on the options 
trading floor; recommend adoption of such rules as it deems 
necessary for the convenient and orderly transaction of business 
upon the equity and index options trading floor; enforce rules and 
regulations relating to order, decorum, health, safety and welfare 
on the equity and index options trading floor; and resolve trading 
disputes on the equity and index options trading floor. Pursuant to 
Article X, Section 10-17, the FCO Committee has analogous powers and 
duties in respect of the FCO trading floor. The Exchange notes that 
pursuant to Rule 124, trading disputes are now settled by Options 
Exchange Officials (``OEOs''). See Securities Exchange Act Release 
No. 55877 (June 7, 2007), 72 FR 32937 (June 14, 2007) (SR-Phlx-2006-
87). OEOs are defined in Rule 1(pp).
    \22\ See NASDAQ Stock Market By-Law Article III, Section 6(c).
    \23\ Equities do not currently trade on the Exchange.
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    The new QMC would include broad representation of various 
participant groups in the Exchange, including investors, specialist and 
registered options trader (``ROT'') firms, retail firms, and order 
entry firms. Specifically, the QMC would include a number of Member 
Representative members \24\ that is equal to at least 20 percent of the 
total number of members of the committee. Furthermore, the number of 
Non-Industry members (i.e., committee members not associated with 
broker-dealers) \25\ on the QMC would equal the sum of the number of 
Industry members \26\ and Member Representative members. The Exchange 
believes that the proposed composition of the QMC would reflect a 
``fair representation'' of Exchange members.\27\
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    \24\ ``Member Representative member'' is defined as a member of 
any committee appointed by the Board of Governors who has been 
elected or appointed after having been nominated pursuant to these 
By-Laws. The definition of ``Member Representative member'' is also 
proposed to be modified in SR-Phlx-2009-17. See proposed By-Law 
Article I, Section 1-1(qq), which is based on NASDAQ Stock Market 
By-Law Article I(r).
    \25\ ``Non-Industry member'' is defined as a member of any 
committee appointed by the Board of Governors who is (i) a Public 
member; (ii) an officer, director, or employee of an issuer of 
securities listed on the Exchange; or (iii) any other individual who 
would not be an Industry member. See proposed By-Law Article I, 
Section 1-1(oo), which is based on NASDAQ Stock Market By-Law 
Article I(w). ``Public Member'' is defined as a member of any 
committee appointed by the Board of Governors who has no material 
business relationship with a broker or dealer, the Exchange, or its 
affiliates. See proposed By-Law Article I, Section 1-1(pp) [sic], 
which is based on NASDAQ Stock Market By-Law Article I(z). The 
definitions of ``Non-Industry member'' and ``Public Member'' are 
also proposed to be modified in SR-Phlx-2009-17.
    \26\ ``Industry member'' is defined as a member of any committee 
appointed by the Board who (i) is or has served in the prior three 
years as an officer, director, or employee of a broker or dealer, 
excluding an outside director or a director not engaged in the day-
to-day management of a broker or dealer; (ii) is an officer, 
director (excluding an outside director), or employee of an entity 
that owns more than ten percent of the equity of a broker or dealer, 
and the broker or dealer accounts for more than five percent of the 
gross revenues received by the consolidated entity; (iii) owns more 
than five percent of the equity securities of any broker or dealer, 
whose investments in brokers or dealers exceed ten percent of his or 
her net worth, or whose ownership interest otherwise permits him or 
her to be engaged in the day-to-day management of a broker or 
dealer; (iv) provides professional services to brokers or dealers, 
and such services constitute 20 percent or more of the professional 
revenues received by the committee member or 20 percent or more of 
the gross revenues received by the committee member's firm or 
partnership; (v) provides professional services to a director, 
officer, or employee of a broker, dealer, or corporation that owns 
50 percent or more of the voting stock of a broker or dealer, and 
such services relate to the director's, officer's, or employee's 
professional capacity and constitute 20 percent or more of the 
professional revenues received by the committee member or 20 percent 
or more of the gross revenues received by the committee member's 
firm or partnership; or (vi) has a consulting or employment 
relationship with or provides professional services to the Exchange 
or any affiliate thereof or to FINRA (or any predecessor) or has had 
any such relationship or provided any such services at any time 
within the prior three years. The definition of ``Industry member'' 
is also proposed to be modified in SR-Phlx-2009-17. See proposed By-
Law Article I, Section 1-1(nn), which is based on NASDAQ Stock 
Market By-Law Article I(m).
    \27\ See Section 6(b)(3) of the Act setting forth, among other 
things, the objective of ``fair representation'' of an exchange's 
members in the administration of its affairs. 15 U.S.C. 78f(b)(3).
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    By-Law Article VIII, Section 8-1 currently states that the Chairs 
of the Options Committee and the FCO Committee preside over the 
Exchange's options and FCO trading floors. The Exchange proposes to 
amend its By-Law Article VIII, Section 8-1 to eliminate reference to 
the Chairs of the Options Committee and FCO Committee and to indicate 
that the President of the Exchange and his designee would be vested 
with supervision over the options trading floor.\28\ In particular, 
updated Article VIII, Section 8-1 would indicate that the President of 
the Exchange and his designated staff shall have: general supervision 
over the options trading floor as well as general supervision of the 
dealings of members on the trading floor and on Exchange trading 
systems, and of the premises of the Exchange immediately adjacent 
thereto; supervision of all connections or means of communications with 
the options trading floor; and supervision over the location of 
equipment and the assignment and use of space on the options trading 
floor. Section 8-1 would also indicate that the President shall have 
supervision over relations with other options exchanges; and that the 
Exchange shall make and enforce rules and regulations relating to 
order, decorum, health, safety and welfare on the options trading floor 
and the immediately adjacent premises of the Exchange and shall be 
empowered to impose penalties for violations thereof. The Exchange 
believes that vesting this authority with the President of the

[[Page 16253]]

Exchange is appropriate, should streamline Exchange processes, and is 
similar to the NASDAQ Stock Market.\29\
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    \28\ By-Law Article VIII, Section 8-1 also refers to XLE, which 
was the Exchange's electronic system for the entry, display, 
execution, and reporting of orders in NMS stocks. XLE was 
discontinued on October 24, 2008, and is no longer operating. See 
Securities Exchange Act Release No. 58613 (September 22, 2008), 73 
FR 57181 (October 1, 2008) (SR-Phlx-2008-65). References to XLE will 
be removed from By-Law Article VIII, Section 8-1; Article I, Section 
1-1; and Article X, Sections 10-11 and 10-15.
    \29\ See NASDAQ Stock Market By-Law Article IV, Section 5 
(vesting general supervision of the operations of the NASDAQ Stock 
Market in the President).
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    As with other eliminated committees, the Exchange proposes to 
delete all references to the Options Committee and the FCO Committee, 
clarify references to the Exchange or its staff, and generally make 
changes in a variety of by-laws, rules, and OFPAs that correspond to 
the proposed by-law amendments.\30\
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    \30\ See By-Law Article XXVII, Section 27-3; Rules 60, 101, 124, 
508, 606, 1012, 1014, 1017, 1061, 1064, 1066, 1079, and 1080; and 
OFPAs A-12, A-13, A-14, B-6, F-27, F-28, and F-31.
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Business Conduct Committee

    The Business Conduct Committee (``BCC'') is the Exchange's 
disciplinary committee. It has exclusive jurisdiction to, among other 
things: monitor compliance with the Act and rules and regulations 
thereunder, with the Exchange's By-Laws and Rules and any 
interpretations thereof, and with the rules, regulations and policies 
of the Board or any Exchange committees; and authorize the initiation 
of any disciplinary actions or proceedings brought by the Exchange.\31\ 
The BCC currently consists of nine members that include: three 
Independent Governors; one member or person associated with a member 
organization who conducts business on XLE; one member who conducts 
options business at the Exchange; and four persons who are members or 
persons associated with a member organization. The Exchange proposes to 
change the required number of members on BCC and the qualifications for 
committee membership.
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    \31\ See By-Law Article X, Section 10-11. Because the functions 
and duties of BCC are clearly set forth in Section 10-11, the 
Exchange proposes to delete Rule 700, Powers and Duties, which the 
Exchange believes superfluously lists the rules administered by BCC.
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    The Exchange proposes to change By-Law Article X, Section 10-11 to 
give the Board discretion to establish not less than five or more than 
nine members of BCC.\32\ The Exchange also proposes that the BCC would 
be populated from three distinct groups. The majority of the committee 
members would be Non-Industry members and the remaining committee 
members would be Industry members. Significantly, to further ensure 
fair representation of Exchange members on this important 
committee,\33\ at least one committee member would have to be a member 
of the Exchange that conducts an options business at Phlx.\34\
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    \32\ In By-Law-Article X, Section 10-11, the Exchange also adds 
a cross-reference to By-Law Article VIII, Section 8-1.
    \33\ See Section 6(b)(3) of the Act setting forth, among other 
things, the objective of ``fair representation'' of an Exchange's 
members in the administration of its affairs. 15 U.S.C. 78f(b)(3).
    \34\ The Exchange is deleting the requirement to have one BCC 
member that is an Exchange member or is associated with a member 
organization that conducts equity business on XLE, as XLE is no 
longer operating. See supra note 17.
    The Commission notes that Phlx has committed to submit a 
separate proposed rule change further modifying Phlx By-Law Article 
X, Section 10-11 to clarify that the BCC shall include a number of 
committee members equal to at least 20% of the total number of 
members on the BCC that are representative of Phlx members./FTNT>
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    The Exchange also proposes to update certain provisions in its 
disciplinary procedures in furtherance of conforming its hearings 
processes with those of the NASDAQ Stock Market.\35\ Specifically, the 
Exchange is changing the composition of its disciplinary Hearing Panel 
by deleting the requirement to have a Hearing Officer. Currently, 
Exchange disciplinary hearings on a Statement of Charges \36\ are held 
before a three person Hearing Panel appointed by the Chair of the BCC 
and the presiding person of each Hearing Panel is a Hearing Officer. 
The Exchange is eliminating the Hearing Officer position. The Exchange 
proposes to change its By-Law Article X, Section 10-11 to delete 
references to a Hearing Officer.
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    \35\ See Rules 960.1 to 960.12 (Exchange disciplinary hearing 
rules) and NASDAQ Stock Market Rules 4800 to 4816 (NASDAQ Stock 
Market delisting hearing rules).
    \36\ See Rules 960.2 and 960.3.
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    The Exchange proposes to change various rules in the 960 series to 
delete references to the Hearing Officer, and to clarify references to 
the Hearing Panel.\37\ The Exchange also proposes to add the definition 
of a Hearing Attorney in Rule 960.5 to indicate that, among other 
things, the Hearing Attorney will take over the administrative duties 
that the Hearing Officer previously handled, will advise the Hearing 
Panel on applicable rules and procedure, but will not be a voting 
member of the Hearing Panel.\38\ The process of appealing from Hearing 
panel decisions will remain the same.\39\
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    \37\ See Rules 960.4, 960.5, 960.6, 960.8, 960.9, 960.10, 
960.11, and 970.
    \38\ Proposed subsection (a)(4) of Rule 960.5 states: A Hearing 
Attorney shall assist the Hearing Panel in the discharge of its 
duties. The Hearing Attorney shall not have a vote in the Panel's 
disposition of the matter, but will advise the Panel on the 
application of the Disciplinary Rules, Guidelines for Sanctions, and 
relevant precedent. The Hearing Attorney will not be permitted to be 
involved in any manner in the investigation of possible misconduct, 
to participate in the consideration by the Business Conduct 
Committee of whether to institute a disciplinary action, to render a 
decision following a hearing without the concurrence of a majority 
of the Hearing Panel, rule upon requests to disqualify the Hearing 
Attorney or any member of the Hearing Panel, or issue citations for 
violations of Exchange rules or floor procedure advices.
    \39\ Appeals may be initiated by filing with the Exchange a 
written notice of appeal within 10 days after a decision is 
rendered, and will be conducted by the Board or an Advisory 
Committee appointed by the Board. See By-Law Article XI, Sections 
11-1, 11-2, and 11-3. The Exchange proposes to delete reference to 
``Hearing Officer'' in the title of By-Law Article XI, Section 11-3.
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    The Exchange additionally proposes rule changes to update and 
conform certain disciplinary rules. To that end, the Exchange proposes 
amendments that would: update references to the Exchange's Regulatory 
Department in Rule 960.2; add the ability to serve documents by 
electronic delivery upon mutual consent of the parties in Rule 960.11; 
and clarify that Hearing Panelists may be paid additional compensation 
in extraordinary cases in Rule 960.5.
    The Exchange believes that allowing the Board to reduce the number 
of members on BCC by as much as 44% should make the committee more 
efficient. The Exchange also believes that requiring that the BCC be 
composed of Non-Industry members and Industry members that are defined 
similarly by the Exchange and the NASDAQ Stock Market, and introducing 
a Hearing Attorney position in lieu of a Hearing Officer, should make 
the Exchange and NASDAQ Stock Market hearing processes more similar 
while maximizing the fairness and independence of the Exchange's BCC 
and disciplinary proceedings.

Finance Committee

    Currently, the Finance Committee is a permanent standing committee 
of the Board.\40\ The Exchange proposes to amend its By-Law Article X, 
Section 10-1 to indicate that the Finance Committee would be an 
optional committee, to be appointed only if deemed necessary by the 
Board, and that the Finance Committee would have such powers and duties 
with respect to the financial operation of the Exchange as may be 
delegated by the Board. The Exchange proposes to amend its By-Law 
Article X, Section 10-15 to make corresponding changes indicating the 
optional nature of the Finance Committee. Should a Finance Committee 
not be appointed by the Board, however, pursuant to By-Law

[[Page 16254]]

Article IV, the Board continues to retain the power to review the 
Exchange's finances.\41\
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    \40\ The Finance Committee has the jurisdiction to, among other 
things, report to the Board regarding: examination of the accounts 
and vouchers of the Exchange; prepare estimates of the income and 
recommendations as to appropriations for expenses, and assist in the 
preparation of the annual budget and make recommendations thereon. 
See By-Law Article X, Section 10-15.
    \41\ See By-Law Article IV, Section 4-4.
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    The Exchange's proposal to make the Finance Committee optional is 
similar to the NASDAQ Stock Market, where the Finance Committee is 
optional, at the discretion of the Board.\42\
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    \42\ See NASDAQ Stock Market By-Law Article III, Section 5(b) 
(Board may appoint a Finance Committee to advise regarding financial 
operations and conditions of NASDAQ Stock Market).
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Emergency or Extraordinary Market Conditions

    The Exchange proposes adoption of new By-Law Article IV, Section 4-
23, which is similar to NASDAQ Stock Market By-Law Article IX, Section 
5 authorizing the Board or its designee to take certain actions in the 
event of an emergency or extraordinary market conditions. Specifically, 
new By-Law IV, Section 4-23 states that in the event of an emergency or 
extraordinary market conditions, the Board or such person as may be 
designated by the Board, shall have the authority to take any action 
regarding: the trading in or operation of the Exchange or any other 
organized securities markets that may be operated by the Exchange, the 
operation of any automated system owned or operated by the Exchange, 
and the participation in any such system or any or all persons or the 
trading therein of any or all securities; and the operation of any or 
all offices or systems of members and member organizations, if, in the 
opinion of the Board or its designee, such action is necessary or 
appropriate for the protection of investors or the public interest or 
for the orderly operation of the marketplace or the system. Although 
the Exchange has other ``extraordinary market conditions'' provisions 
in its rules,\43\ the Exchange seeks adoptions of a provision that is 
similar to the NASDAQ Stock Market.
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    \43\ See e.g. Rules 1080(e) and 98.
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    Finally, the Exchange is proposing technical, housekeeping rule 
changes in respect of references that are obsolete, no longer in use, 
or in need of updating so that Phlx Rules and Advices may be conformed. 
These include references to departments, positions, and committees that 
are renamed or no longer exist (e.g. Market Surveillance Department, 
Market Surveillance, Arbitration Department, Financial Automation, 
Office of Chief Examiner, and Stock List Committee); and to circulars 
that are no longer in use (e.g. exchange and information 
circulars).\44\
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    \44\ See Rules 100, 108, 124, 507, 761, 800, 803, 960.2, 1001, 
1003, 1014, 1017, 1039, 1042, 1047, 1061, 1080, 1092, and 1001A; and 
OFPAs A-12, A-13, A-14, F-7, F-13, F-15, F-22, and F-27. As an 
example, the terms ``Market Surveillance Department'' in Rule 761 
and ``Market Surveillance'' in Rule 1047 are changed to ``regulatory 
staff.''
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2. Statutory Basis
    The Exchange proposes to streamline the governance structure of the 
Exchange by updating, eliminating and consolidating its committees, 
codifying certain emergency functions, updating its disciplinary 
process, and harmonizing Exchange By-Laws, Rules and OFPAs. The 
Exchange believes that its proposal is consistent with Section 6(b) of 
the Act \45\ in general, and furthers the objectives of Section 6(b)(5) 
of the Act \46\ 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 
Exchange believes that its proposal also furthers the objectives of 
Section 6(b)(3) of the Act,\47\ in that it is designed to promote fair 
representation of the members of the Exchange in the administration of 
its affairs, as discussed herein.
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    \45\ 15 U.S.C. 78f(b).
    \46\ 15 U.S.C. 78f(b)(5).
    \47\ 15 U.S.C. 78f(b)(3).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition 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 either solicited or received.

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

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

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change 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-Phlx-2009-23 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-Phlx-2009-23. 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, 100 F Street, NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of such 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 publicly available. All 
submissions should refer to File Number SR-Phlx-2009-23 and should be 
submitted on or before April 30, 2009.

[[Page 16255]]

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\48\
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    \48\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-8001 Filed 4-8-09; 8:45 am]

BILLING CODE 8010-01-P