Document ID: SEC-2009-0683-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; NASDAQ OMX PHLX, Inc., Order Approving Proposed Rule Change as Modified by Amendment Nos. 1 and 2 Thereto To Amend the By-Laws, Rules, and Option Floor Procedure Advices Concerning Governance of the Exchange
Posted Date: 2009-05-20T04:00Z

[Federal Register: May 20, 2009 (Volume 74, Number 96)]
[Notices]               
[Page 23759-23761]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr20my09-95]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59924; File No. SR-Phlx-2009-23]

 
Self-Regulatory Organizations; NASDAQ OMX PHLX, Inc., Order 
Approving Proposed Rule Change as Modified by Amendment Nos. 1 and 2 
Thereto To Amend the By-Laws, Rules, and Option Floor Procedure Advices 
Concerning Governance of the Exchange

May 14, 2009.
    On March 13, 2009, NASDAQ OMX PHLX, Inc. (``Phlx'' or the 
``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 its By-Laws, Rules of the Board of 
Governors, Options Rules, and Option Floor Procedure Advices to make 
changes to certain standing committees and governance processes of the 
Exchange. On March 25, 2009, Phlx filed Amendment No. 1 to the proposed 
rule change. The proposed rule change was published for comment in the 
Federal Register on April 9, 2009.\3\ On April 30, 2009, Phlx filed 
Amendment No. 2 to the proposed rule change.\4\ The Commission received 
no comments regarding the proposal. This order approves the proposed 
rule change, as modified by Amendment Nos. 1 and 2.
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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. 59697 (April 2, 
2009), 74 FR 16249 (``Notice'').
    \4\ In Amendment No. 2, Phlx made technical and conforming 
changes to certain By-Laws, including changes to the paragraph 
numbering in Article I, Section 1-1 (Definitions) and revisions to 
the marking of new rule text in Article X, Sections 10-1 (Standing 
Committees) and 10-15 (Finance Committee). These changes were 
designed to reflect intervening amendments to those By-Laws proposed 
in a preceding Phlx filing (File No. SR-Phlx-2009-17) that were 
recently approved by the Commission. See Securities Exchange Act 
Release No. 59794 (April 20, 2009), 74 FR 18761 (April 24, 2009) 
(SR-Phlx-2009-17). Because Amendment No. 2 is technical in nature, 
the Commission is not required to publish it for comment.
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    In its filing, the Exchange proposes to conform its governance 
structure to more closely resemble that of its corporate siblings, The 
NASDAQ Stock Market LLC (``Nasdaq'') and NASDAQ OMX BX, Inc. 
(``BX'').\5\ In particular, Phlx proposes to eliminate the Admissions 
Committee and the Options Allocation, Evaluation and Securities 
Committee (``Allocation 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.\6\ Phlx 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 Board or its 
designee to take certain actions in the event of an emergency or 
extraordinary market conditions. Finally, the Exchange proposes 
technical changes that, among other things, delete obsolete references 
to departments and positions that have been re-named or no longer 
exist.
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    \5\ The Exchange, Nasdaq, and BX are subsidiaries of The NASDAQ 
OMX GROUP, Inc. See Securities Exchange Act Release No. 58179 (July 
17, 2008), 73 FR 42874 (July 23, 2008) (SR-Phlx-2008-31) (order 
approving changes to the Exchange's governing documents in 
connection with its acquisition by The NASDAQ OMX Group, Inc.).
    \6\ The Weekly Bulletin contained, among other things, notice of 
changes in permit holder and member organization status and 
applications. Currently, if the Admissions Committee votes favorably 
regarding a request by an applicant, Phlx posts his or her name in 
the Weekly Bulletin and on its Web site for seven days to invite 
readers to report information regarding applications and applicants. 
The Exchange proposes to eliminate the Weekly Bulletin and instead 
provide notification regarding membership approvals on its Web site.
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    Pursuant to this proposed rule change, the eleven current standing 
committees of the Board of Governors of the Exchange (``Board'') would 
be reduced to eight.\7\ Of those eight, the Finance Committee would 
become optional at the discretion of the Board.\8\
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    \7\ The remaining standing committees would be: Executive 
Committee, Audit Committee, Business Conduct Committee, Compensation 
Committee, Finance Committee, Nominating Committee, Member 
Nominating Committee, and Quality of Markets Committee. See Phlx By-
Law Article X, Section 10-1. See also Amendment No. 2 (reflecting 
changes made by SR-Phlx-2009-17 to create the Nominating Committee 
and the Member Nominating Committee).
    \8\ The Exchange noted that Nasdaq's Finance Committee is also 
optional at the discretion of Nasdaq's board of directors. See 
Notice, supra note 3, at 74 FR 16254.
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    The Commission has carefully reviewed the proposed rule change and 
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 \9\ including, in particular, Section 
6(b)(1) of the Act,\10\ which requires a national securities exchange 
to be so organized and have the capacity to carry out the purposes of 
the Act and to enforce compliance by its members and persons associated 
with its members with the provisions of the Act; Section 6(b)(3) of the 
Act,\11\ which requires that the rules of a national securities 
exchange assure a fair representation of its members in the selection 
of its directors and administration of its affairs, and provide that 
one or more directors shall be representative of issuers and investors 
and not be associated with a member of the exchange, broker or dealer; 
and Section 6(b)(5) of the Act,\12\ which requires that an exchange 
have rules designed 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, protect investors and the 
public interest.
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    \9\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \10\ 15 U.S.C. 78f(b)(1).
    \11\ 15 U.S.C. 78f(b)(3).
    \12\ 15 U.S.C. 78f(b)(5).
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    The proposed rule change will conform certain of the By-Laws and 
rules of the Exchange to those of Nasdaq, while maintaining the fair 
representation of the Exchange's members in the administration of the 
affairs of the Exchange. Among other things, the Exchange proposes to 
eliminate the Admissions Committee, and to have the Phlx Membership 
Department perform the functions that are currently performed by the 
Admissions Committee. In this respect, the proposed change would 
reflect the practice at Nasdaq, which does not have an Admissions 
Committee and whose staff handles membership application

[[Page 23760]]

processing and decisions regarding membership.\13\ As proposed, the 
Membership Department would assume responsibility for administering the 
admissions and membership processes currently overseen by that 
committee including, among other things, the admission, denial, 
reinstatement and revocation of membership to the Exchange.\14\
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    \13\ See Notice, supra note 3, at note 13.
    \14\ According to the Exchange, its staff has been ``involved in 
virtually all aspects of the Exchange's admissions and membership 
process,'' including assisting the Admissions Committee in the 
performance of its duties. See Notice, supra note 3, at 74 FR 16250. 
To accomplish this transfer, the Exchange proposes to delete By-Law 
Article X, Section 10-6 (Admissions Committee) and transfer the 
duties and functions of that committee to the Membership Department 
in new Rule 900.1 (General Powers and Duties of Membership 
Department). In addition, Exchange proposes to delete By-Law Article 
XII, Section 12-5, which sets forth duties and functions of the 
Admissions Committee with respect to applications for permits and 
admission as a foreign currency options participant, and transfer 
those duties to the Membership Department in new Rule 900.2 
(Membership Applications).
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    An applicant for Exchange membership or admission whose application 
is not approved currently has a right to an appeal hearing pursuant to 
By-Law Article XI. The Exchange proposes to include the Membership 
Department in this By-Law in order to permit appeals from Membership 
Department decisions.\15\ Accordingly, the current appeal rights of 
applicants will be preserved.
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    \15\ Such appeals would be heard by a special committee of the 
Board composed of at least three governors, at least one of which 
would be an Independent Governor. See Phlx By-Law Article XI, 
Section 11-1(c). Designated Independent Governors are selected 
through a process that is subject to the input of Phlx's Member 
Organization Representatives. See Phlx By-Law Article III, Section 
3-2 (Member Nominating Committee creates a list of candidates for 
each Designated Governor Position); see also Article I, Section 1-
1(e) (Designated Governors include Designated Independent 
Governors).
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    Similarly, the Exchange proposes to delete the Allocations 
Committee and have the Exchange's staff perform the duties and 
functions that are currently performed by the Allocation Committee.\16\
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    \16\ The Exchange notes that Nasdaq does have a board of 
directors committee that is equivalent to the Allocation Committee. 
See Notice, supra note 3, at note 20.
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    In addition, the Exchange proposes to combine its Options Committee 
and Foreign Currency Options Committee, which are currently two 
separate Board committees, into the existing Quality of Markets 
Committee. The duties and functions of the Exchange's reformulated 
Quality of Markets Committee would be analogous to those of the 
Nasdaq's Quality of Markets Committee and would include, among other 
things, responsibility for advising the Board on issues relating to the 
fairness, integrity, efficiency, and competitiveness of the Exchange's 
market. The Quality of Markets Committee would include a number of 
Member Representative members that is equal to at least twenty percent 
of the total number of members of the Quality of Markets Committee.\17\ 
In addition, the number of Non-Industry members on the Quality of 
Markets Committee would equal the sum of the number of Industry members 
and Member Representative members. Accordingly, the proposed new 
formulation for the Quality of Markets Committee would continue to 
assure the fair representation of the Exchange's members on this 
committee.
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    \17\ A Member Representative Member is ``a member of any 
committee appointed by the Board of Governors who has been elected 
or appointed after having been nominated by the Member Nominating 
Committee.'' See Phlx By-Law Article I, Section 1-1.
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    The Exchange also proposes to provide that the President of the 
Exchange, and his or her designated staff, would have general 
supervision over the options trading floor as well as general 
supervision over the dealings of members on the trading floor and on 
Exchange trading systems. The President would also be given 
responsibility regarding supervision of relations with other options 
exchanges. The Exchange notes that such authority is consistent with 
the practice at Nasdaq.\18\ Similarly, the Exchange proposes to adopt a 
By-Law provision similar to Nasdaq that authorizes the Board or its 
designee to take certain actions in the event of an emergency or 
extraordinary market conditions.\19\
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    \18\ See Notice, supra note 3, at note 29.
    \19\ See Proposed Phlx By-Law Article IV, Section 4-23. See also 
Nasdaq By-Law Article IX, Section 5. In addition, the Exchange 
currently has other extraordinary market conditions provisions in 
its rules. See Rules 1080(e) and 98.
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    Further, the Exchange proposes to alter the composition of the 
Business Conduct Committee, which serves as the disciplinary committee 
of the Exchange. As amended, the Business Conduct Committee could 
consist of not less than five, or more than nine, members.\20\ In 
addition, the majority of committee members would be Non-Industry 
members, and the remaining committee members would be Industry members. 
At least one BCC member would have to be a member of the Exchange that 
conducts an options business at Phlx. The Exchange has informed the 
Commission that, upon approval, it initially intends to have five 
persons serve on the BCC.\21\
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    \20\ The BCC currently consists of nine members including three 
Independent Governors, one member or person associated with a member 
organization who conducts business on XLE (Phlx's electronic equity 
trading system), one member who conducts an options business at the 
Exchange, and four persons who are members or persons associated 
with a member organization. In particular, the Exchange poses to 
eliminate the requirement to seat on the BCC one member or person 
associated with a member organization who conducts business on XLE, 
because XLE is no longer operating. See Notice, supra note 3, at 
note 34.
    \21\ See E-mail from Jurij Trypupenko, Assistant General 
Counsel, The NASDAQ OMX Group, Inc., to Richard Holley III, Senior 
Special Counsel, Division of Trading and Markets, Commission, dated 
May 14, 2009. Phlx has committed to submit a separate proposed rule 
change by its July 2009 Board meeting to clarify in Article X, 
Section 10-11 that the Business Conduct Committee shall include a 
number of committee members equal to at least 20% of the total 
number of members on the Business Conduct Committee that are 
representative of Phlx members. This provision would be relevant 
only in the event that the Exchange chose to appoint six or more 
members to the BCC, since with a five member BCC the required 
appointment of ``at least one'' committee member who is a member of 
the Exchange that conducts an options business at Phlx would satisfy 
the 20% requirement.
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    In addition, the Exchange proposes to conform its hearings 
processes to more closely resemble those of Nasdaq. Specifically, the 
Exchange proposes to change the composition of its disciplinary hearing 
panel by deleting the requirement to have a presiding Hearing Officer. 
In its place, a new position of Hearing Attorney would be created to 
assume the administrative duties that the Hearing Officer previously 
handled. The Hearing Attorney would advise the Hearing Panel on 
applicable rules and procedures, but would not be a voting member of 
the Hearing Panel. The process of appealing Hearing Panel decisions 
would remain unchanged.
    The Commission notes that the Exchange's proposal is designed to 
more closely align certain aspects of Phlx's governance structure and 
processes to more closely resemble that of Nasdaq, which, like the 
Exchange, is a subsidiary of NASDAQ OMX GROUP, Inc. As discussed above, 
the Commission finds that the proposal is consistent with the Act. In 
particular, the proposal should allow the Exchange to be so organized 
and have the capacity to carry out the purposes of the Act and to 
enforce compliance by its members and persons associated with its 
members with the provisions of the Act, and should continue to assure 
the fair representation of the Exchange's members in the administration 
of its affairs.
    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (SR-Phlx-2009-

[[Page 23761]]

23), as modified by Amendment Nos. 1 and 2, be, and it hereby is, 
approved.
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    \22\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-11739 Filed 5-19-09; 8:45 am]

BILLING CODE 8010-01-P