Document ID: SEC-2009-0126-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: New York Stock Exchange LLC
Posted Date: 2009-01-28T05:00Z

[Federal Register: January 28, 2009 (Volume 74, Number 17)]
[Notices]               
[Page 5014-5019]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr28ja09-93]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59281; File No. SR-NYSE-2008-120]

 
Self-Regulatory Organizations; New York Stock Exchange LLC; Order 
Approving Proposed Rule Change Relating to the Limited Liability 
Company Agreement of New York Block Exchange, a Facility of NYSE

January 22, 2009.

I. Introduction

    On November 14, 2008, the New York Stock Exchange, LLC (``NYSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') a proposed rule change, pursuant to Section 
19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 
19b-4 thereunder,\2\ in connection with the formation of a joint 
venture between NYSE and BIDS Holdings L.P. (``BIDS''), a Delaware 
limited partnership, to establish a new electronic trading facility of 
the Exchange, the New York Block Exchange (``NYBX''). The proposed rule 
change was published for comment in the Federal Register on November 
24, 2008.\3\ The Commission received no comments on 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. 58970 (November 17, 
2007), 73 FR 71062 (November 24, 2008) (``Notice'').
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II. Overview

    NYSE proposes to establish NYBX as a facility \4\ of the Exchange. 
NYBX would provide for electronic matching and execution of non-
displayed orders with the aggregate of all displayed and non-displayed 
orders residing within NYBX and the NYSE Display Book. The Exchange 
represents that NYBX would consider protected quotations of all 
automated trading centers.\5\ Only securities listed on NYSE would be 
eligible to trade on NYBX.
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    \4\ Pursuant to Section 3(a)(2) of the Act, 15 U.S.C. 78c(a)(2), 
the term ``facility'' when used with respect to an exchange, 
includes ``its premises, tangible or intangible property whether on 
the premises or not, any right to the use of such premises or 
property or any service thereof for the purpose of effecting or 
reporting a transaction on an exchange (including, among other 
things, any system of communication to or from the exchange, by 
ticker or otherwise, maintained by or with the consent of the 
exchange), and any right of the exchange to the use of any property 
or service.''
    \5\ See Notice, supra note 3, 73 FR at 71062. The terms 
``protected quotations'' and ``automated trading centers'' will have 
the same meanings as defined in Rule 600 of Regulation NMS, 17 CFR 
242.600.
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    NYBX would be owned and operated by the New York Block Exchange LLC 
(``Company''), a Delaware limited liability company (``LLC''). With 
this proposed rule change, the Exchange seeks the Commission's approval 
of the proposed governance structure of the Company as reflected in the 
Limited Liability Company Agreement (``LLC Agreement''). In a separate 
action today, the Commission approved the Exchange's proposed rule 
change to establish the trading rules for NYBX.\6\
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    \6\ See Securities Exchange Act Release No. 59282 (SR-NYSE-2008-
119).
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    NYSE and BIDS each would own a 50% economic interest (``Interest'') 
\7\ in the Company. In addition to its Interest, NYSE would enter into 
an agreement with the Company (``Services Agreement'') pursuant to 
which NYSE would perform certain financial, operational, information 
technology, and development services for the Company.\8\ As a self-
regulatory organization (``SRO''), NYSE has regulatory responsibility 
for all of its facilities, including NYBX. The Exchange has delegated 
certain of its self-regulatory responsibilities to its wholly owned 
subsidiary, NYSE Regulation, Inc. (``NYSE Regulation''), which performs 
the regulatory functions of NYSE pursuant to a delegation agreement. In 
the LLC Agreement, the Members acknowledge and agree that NYSE 
Regulation would carry out certain regulatory oversight of NYBX.\9\
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    \7\ ``Interest'' means the ownership interest in the Company, 
including its interest in the capital, profits, losses, and 
distributions of the Company. See Section 2.1 of the LLC Agreement. 
A person that holds an economic interest in an LLC generally must 
become party to the LLC Agreement and is referred to as a 
``Member.'' See id.
    \8\ See Notice, supra note 3, 73 FR at 71062.
    \9\ See Section 8.1(c) of the LLC Agreement.
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    The board of directors of the Company (``Board of Directors'') 
would manage the business and affairs of the Company \10\ but would 
delegate the day-to-day operations of the Company and the development 
of NYBX to the Exchange pursuant to the Services Agreement.\11\ The 
Board of Directors would consist of two individuals designated by NYSE 
(``NYSE Directors'') and two individuals designated by BIDS (``BIDS 
Directors'').\12\ The Members would not otherwise participate in the 
management or control of the Company's business.\13\
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    \10\ See Sections 8.1(a) and 8.3 of the LLC Agreement.
    \11\ See Section 8.1(b) of the LLC Agreement.
    \12\ See Section 8.3(a) of the LLC Agreement.
    \13\ See Section 7.1(a) of the LLC Agreement.

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[[Page 5015]]

III. Discussion and Commission Findings

    After careful consideration, 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.\14\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(1) of the Act,\15\ which, 
among other things, requires a national securities exchange to be so 
organized and have the capacity to be able 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, the rules and 
regulations thereunder, and the rules of the exchange. The Commission 
also finds that the proposed rule change is consistent with Section 
6(b)(5) of the Act,\16\ which requires, among other things, that the 
rules of a national securities exchange be designed to prevent 
fraudulent and manipulative acts and practices; to promote just and 
equitable principles of trade; to foster cooperation and coordination 
with persons engaged in regulating, clearing, settling, and processing 
information with respect to, and facilitating transactions in 
securities; 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.
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    \14\ In approving the proposed rule change, the Commission has 
considered its impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \15\ 15 U.S.C. 78f(b)(1).
    \16\ 15 U.S.C. 78f(b)(5).
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A. NYBX as a Facility of the Exchange

    The Commission believes that the proposed rule change is consistent 
with Section 6(b)(1) of the Act in that, upon establishing NYBX as a 
facility of the Exchange, NYSE would remain so organized and have the 
capacity to carry out the purposes of the Act. As an SRO, the Exchange 
would have regulatory control over NYBX and would be responsible for 
ensuring its compliance with the federal securities laws and all 
applicable rules and regulations thereunder. Furthermore, the Company 
is obligated under the LLC Agreement to operate NYBX in a manner 
consistent with the regulatory and oversight responsibilities of NYSE 
and the Act and rules and regulations thereunder. The Commission notes 
that it previously approved similar structures with respect to the 
operation of exchange facilities.\17\
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    \17\ See Securities Exchange Act Release Nos. 55389 (March 2, 
2007), 72 FR 10575 (March 8, 2007) (order approving CBOE Stock 
Exchange as a facility of the Chicago Board Options Exchange) 
(``CBSX Order''); 54399 (September 1, 2006), 71 FR 53728 (September 
12, 2006) (order approving the ISE Stock Exchange as a facility of 
the International Securities Exchange) (``ISE Stock Order''); 54364 
(August 25, 2006), 71 FR 52185 (order approving the Boston Equities 
Exchange as a facility of the Boston Stock Exchange) (``BeX 
Order''); and 49065 (January 13, 2004), 69 FR 2768 (January 20, 
2004) (order approving the Boston Options Exchange as a facility of 
the Boston Stock Exchange) (``BOX Order'').
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    Although the Company does not carry out any regulatory functions, 
all of its activities must be consistent with the Act. As a facility of 
a national securities exchange, NYBX is not solely a commercial 
enterprise but is an integral part of an SRO that is registered 
pursuant to the Act and therefore subject to obligations imposed by the 
Act. The Commission believes that the LLC Agreement is reasonably 
designed to enable the Company to operate in a manner that is 
consistent with this principle. The LLC Agreement provides that the 
Company, its Members, and the officers, directors, agents, and 
employees of the Company and its Members shall comply with the federal 
securities laws and the rules and regulations promulgated thereunder 
and cooperate with the Exchange and the Commission.\18\ Further, the 
Company, its Members, and the officers, directors, agents, and 
employees of the Company and its Members also agree to engage in 
conduct that fosters and does not interfere with the Company's and the 
Exchange's ability to carry out their respective responsibilities under 
the Act.\19\
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    \18\ See Section 6.1(c) of the LLC Agreement.
    \19\ See id.
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    The LLC Agreement likewise provides that the Board of Directors 
collectively and each member of the Board of Directors individually 
must comply with the federal securities laws and the rules and 
regulations thereunder and cooperate with the Exchange and with the 
Commission.\20\ Moreover, each NYSE Director and BIDS Director must 
take into consideration whether his or her actions would cause NYBX or 
the Company to engage in conduct that fosters, and does not interfere 
with, the Exchange's or the Company's ability to carry out their 
respective responsibilities under the Act.\21\
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    \20\ See Sections 8.1(a) and (d) of the LLC Agreement.
    \21\ See Section 8.1(d) of the LLC Agreement.
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    The LLC Agreement stipulates that all confidential information 
pertaining to the self-regulatory function of the Exchange or the 
Company (including but not limited to disciplinary matters, trading 
data, trading practices, and audit information) contained in the books 
and records of the Company would not be made available to any persons 
other than to those officers, directors, employees, and agents of the 
Company and the Members that have a reasonable need to know the 
contents thereof; would be retained in confidence by the Company and 
the Members and their respective officers, directors, employees, and 
agents; and would not be used for any commercial purposes.\22\ Nothing 
in the LLC Agreement, however, would limit or impede the rights of the 
Commission, the Exchange, or NYSE Regulation to access and examine 
confidential information of the Company pursuant to the federal 
securities laws or limit or impede the ability of a member of the Board 
of Directors, any Member, or any officer, director, agent, or employee 
of a Member or the Company to disclose confidential information to the 
Commission, the Exchange, or NYSE Regulation.\23\
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    \22\ See Section 14.1(b) of the LLC Agreement.
    \23\ See Section 14.1(c) of the LLC Agreement.
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    The LLC Agreement also provides that NYSE Regulation will receive 
notice of planned or proposed changes to the Company (excluding Non-
Market Matters \24\) or NYBX, and NYSE Regulation must not object 
affirmatively to such changes prior to implementation.\25\ If NYSE 
Regulation determines that the planned or proposed changes to the 
Company or NYBX could cause the Company or NYBX to operate in a manner 
that is not consistent with the provisions of the LLC Agreement, the 
rules of the Exchange, or the federal securities laws governing NYBX or 
NYSE Market Participants,\26\ or that otherwise impedes the Exchange's 
ability to regulate NYBX or NYSE Market Participants, or to fulfill its 
obligations under the Act as an SRO (each a ``Regulatory Deficiency'' 
\27\), NYSE Regulation may direct the Company to, and the Company must, 
modify the

[[Page 5016]]

planned or proposed changes as necessary to ensure that they do not 
cause a Regulatory Deficiency.\28\ Likewise, if NYSE Regulation 
determines that a Regulatory Deficiency exists or is planned, NYSE 
Regulation may direct the Company to, and the Company must, undertake 
such modifications to the Company (excluding Non-Market Matters) or 
NYBX as are necessary or appropriate to eliminate or prevent the 
Regulatory Deficiency and allow NYSE Regulation to perform and fulfill 
its delegated regulatory responsibilities.\29\
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    \24\ ``Non-Market Matters'' means matters relating solely to one 
or more of the following: marketing, administrative matters, 
personnel matters, social or team-building events, meetings of 
Members, communication with Members, finance, location and timing of 
Board of Directors meetings, market research, real property, 
equipment, furnishings, personal property, intellectual property, 
insurance, contracts unrelated to the operation of NYBX, and de 
minimis items. See Section 2.1 of the LLC Agreement.
    \25\ See Section 8.1(e) of the LLC Agreement.
    \26\ ``NYSE Market Participant'' means any person that is 
registered with the Exchange for purposes of participating in 
equities trading on one or more of the U.S. markets operated by NYSE 
Euronext, the parent company of NYSE. See Section 2.1 of the LLC 
Agreement.
    \27\ See Section 2.1 of the LLC Agreement (defining ``Regulatory 
Deficiency'').
    \28\ See Section 8.1(e) of the LLC Agreement.
    \29\ See id.
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    Furthermore, before any amendment to or repeal of any provision of 
the LLC Agreement becomes effective, such amendment or repeal must be 
filed with, or filed with and approved by, the Commission under Section 
19 of the Act.\30\ In the alternative, an amendment or repeal must be 
submitted to the board of directors of the Exchange and, if the 
Exchange's board of directors determines that such amendment or repeal 
must be filed with, or filed with and approved by, the Commission 
before it can be effectuated, then such amendment or repeal would not 
be effectuated until filed with, or filed with and approved by, the 
Commission.\31\
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    \30\ See Section 13.1 of the LLC Agreement.
    \31\ See id.
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    The Commission believes that certain additional provisions in the 
LLC Agreement that make accommodation for NYSE as the SRO for NYBX are 
consistent with the Act, because they enhance the ability of NYSE to 
carry out its self-regulatory responsibilities with respect to NYBX. 
The LLC Agreement provides that the Board of Directors, by a majority 
vote, may suspend or terminate a Member's voting privileges or 
membership if the Member materially violates a provision of the LLC 
Agreement relating to certain regulatory matters \32\ or any federal or 
state securities law; such Member is subject to statutory 
disqualification; \33\ or such action is necessary or appropriate in 
the public interest or for the protection of investors.\34\ The 
directors designated by the Member subject to sanction would be 
excluded from any vote to suspend or terminate such Member.\35\ 
Moreover, in the event of a meeting of the Board of Directors solely 
with respect to the business of suspending or terminating a Member's 
voting privileges or membership, the presence of directors designated 
by the Member subject to sanction would not be required to constitute a 
quorum to transact the business.\36\
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    \32\ See Section 7.1(b) of the LLC Agreement (enumerating the 
sections of the LLC Agreement for which violations thereof by a 
Member would permit the Board of Directors to suspend or terminate 
the Member's voting privileges).
    \33\ See Section 3(a)(39) of the Act, 15 U.S.C. 78c(a)(39) 
(defining ``statutory disqualification'').
    \34\ See Section 7.1(b) of the LLC Agreement.
    \35\ See id.
    \36\ See Section 8.3(f) of the LLC Agreement.
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    To reflect that NYBX is not solely a commercial enterprise, the LLC 
Agreement also stipulates that any individual designated to the Board 
of Directors may not be subject to any applicable statutory 
disqualification.\37\ Further, any director who becomes subject to a 
statutory disqualification would be deemed to have automatically 
resigned from the Board of Directors.\38\
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    \37\ See Section 8.3(a) of the LLC Agreement.
    \38\ See Section 8.3(b) of the LLC Agreement.
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B. Regulatory Jurisdiction Over the Company and Its Members

    The Commission also believes that the terms of the LLC Agreement 
provide clarification of the Commission's and NYSE's regulatory 
jurisdiction over the Company and its Members. The LLC Agreement 
provides that, to the extent related to the Company's business, the 
books, records, premises, officers, directors, agents, and employees of 
the Company and its Members would be deemed to be the books, records, 
premises, officers, directors, agents, and employees of the Exchange 
for purposes of, and subject to oversight pursuant to, the Act.\39\ The 
LLC Agreement also provides that the books and records of the Company 
must be maintained at the principal office of the Company in New York 
and would be subject at all times to inspection and copying by the 
Commission and the Exchange at no additional charge to the Commission 
or the Exchange.\40\
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    \39\ See Section 6.1(a) of the LLC Agreement.
    \40\ See id.
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    The LLC Agreement further provides that the Company, its Members, 
and the officers, directors, agents, and employees of the Company and 
its Members irrevocably submit to the jurisdiction of the U.S. federal 
courts, the Commission, and the Exchange for purposes of any suit, 
action, or proceeding pursuant to U.S. federal securities laws and the 
rules and regulations thereunder arising out of, or relating to, 
activities of the Company and waive, and agree not to assert by way of 
motion, as a defense or otherwise in any such suit, action, or 
proceeding, any claims that they are not personally subject to the 
jurisdiction of the Commission; the suit, action, or proceeding is an 
inconvenient forum; the venue of the suit, action, or proceeding is 
improper; or that the subject matter may not be enforced in or by such 
courts or agency.\41\ Moreover, the Company and each Member must take 
such action as is necessary to ensure that the Company's and such 
Member's officers, directors, agents, and employees consent in writing 
to the application to them of the provisions in the LLC Agreement with 
respect to their activities relating to the Company.\42\
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    \41\ See Section 6.1(b) of the LLC Agreement.
    \42\ See Section 8.1(d) of the LLC Agreement.
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    The Commission believes that these provisions are consistent with 
the Act because they are reasonably designed to facilitate the 
Commission's and NYSE's regulatory jurisdiction over the Company and 
NYBX. These provisions clarify the Commission's authority under the Act 
to inspect the Company's books and records by deeming them to be the 
books and records of a national securities exchange. Further, these 
provisions clarify that the Commission may exercise its authority under 
Section 19(h)(4) of the Act \43\ with respect to the officers and 
directors of the Company and its Members, because such officers and 
directors are deemed to be officers and directors of the Exchange. 
Finally, the LLC Agreement clarifies that, to the extent that they are 
related to the Company's business, the books and records of the Company 
are subject to the Commission's examination authority under Section 
17(b)(1) of the Act.\44\
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    \43\ 15 U.S.C. 78s(h)(4) (authorizing the Commission, by order, 
to remove from office or censure any officer or director of a 
national securities exchange if it finds, after notice and an 
opportunity for hearing, that such officer or director has: (1) 
willfully violated any provision of the Act or the rules and 
regulations thereunder, or the rules of a national securities 
exchange; (2) willfully abused his or her authority; or (3) without 
reasonable justification or excuse, has failed to enforce compliance 
with any such provision by a member or person associated with a 
member of the national securities exchange).
    \44\ 15 U.S.C. 78q(b)(1).
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    Even in the absence of these provisions, Section 20(a) of the Act 
\45\ provides that any person with a controlling interest in the 
Company would be jointly and severally liable with and to the same 
extent that the Company is liable under any provision of the Act, 
unless the controlling person acted in good faith and did not directly 
or indirectly induce the act or acts constituting the violation or 
cause of action. Moreover, NYSE is required to enforce compliance with 
these provisions, because they are ``rules of the exchange'' within the 
meaning of Section 3(a)(27) of the Act.\46\ A failure on the part of 
NYSE to enforce its rules

[[Page 5017]]

could result in suspension or revocation of its registration, pursuant 
to Section 19(h)(1) of the Act.\47\
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    \45\ 15 U.S.C. 78t(a).
    \46\ 15 U.S.C. 78c(a)(27).
    \47\ 15 U.S.C. 78s(h)(1).
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C. Changes of Ownership Interests in the Company

    The Commission believes that the provisions in the LLC Agreement 
relating to changes of Interests in, and changes in control of, the 
Company are consistent with the Act. The LLC Agreement provides that 
NYSE's Interest would not decline below 50% unless and until NYSE had 
delivered to the Board of Directors a notice in writing of its 
intention to Transfer \48\ its Interest such that the Exchange, either 
alone or together with its Related Persons,\49\ would hold less than a 
50% Interest in the Company.\50\ Furthermore, before the Exchange could 
reduce its Interest to less than 50%, the Exchange must first file a 
proposed rule change with the Commission under Section 19(b) of the Act 
and obtain the Commission's approval of that proposal.\51\ NYSE's 
regulatory obligations for NYBX would endure as long as NYBX is a 
facility of the Exchange, regardless of the size of NYSE's Interest in 
the Company.\52\ Nevertheless, the Commission believes that it is 
reasonable for the Exchange to alert the Commission of any reduction in 
its Interest in the Company. Such a reduction could warrant additional 
review of the LLC Agreement to ensure that NYSE's responsibilities as 
the SRO for NYBX are not compromised.
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    \48\ See Section 9.1 of the LLC Agreement (defining 
``Transfer'').
    \49\ ''Related Person'' means, with respect to any person, any 
other person that directly, or indirectly through one or more 
intermediaries, Controls, is Controlled by, or is under common 
Control with, such person. See id. ``Control'' means the possession, 
directly or indirectly, of the power to direct or cause the 
direction of the management or policies of a person, whether through 
ownership or voting of securities, by contract or otherwise. See id.
    \50\ See Section 9.8(c) of the LLC Agreement.
    \51\ See id.
    \52\ See Securities Exchange Act Release Nos. 58324 (August 7, 
2008), 73 FR 46936 (August 12, 2008) (order approving the transfer 
of the Boston Stock Exchange's ownership interest in the Boston 
Options Exchange Group, the operator of the BOX facility, to MX U.S. 
2, Inc., a wholly owned subsidiary of the Montreal Exchange); 44983 
(October 25, 2001), 66 FR 55225 (November 1, 2001) (order approving 
the establishment of Archipelago Exchange as a facility of the 
Pacific Exchange where Pacific Exchange's ownership interest in 
Archipelago Exchange, L.L.C. (``Arca L.L.C.''), the operator of 
Archipelago Exchange, consisted solely of a 10% interest in 
Archipelago Holdings, LLC, the parent company of Arca L.L.C.); 41210 
(March 24, 1999), 64 FR 15857 (April 1, 1999) (order approving 
electronic system operated as a facility of Philadelphia Stock 
Exchange (``Phlx''), which had no ownership interest in the 
operation of the system); and 54538 (September 29, 2006), 71 FR 
59184 (October 6, 2006) (order approving Phlx's New Equity Trading 
system and operation of optional outbound router as a facility of 
Phlx, which had no ownership interest in the third-party operator).
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    The LLC Agreement also provides that no person that is not a Member 
as of the effective date of the LLC Agreement, either alone or together 
with its Related Persons, may directly own an Interest in the Company 
exceeding 20% (``Concentration Limitation'').\53\ The Concentration 
Limitation, however, would not apply to the Exchange.\54\ Further, the 
LLC Agreement permits the Concentration Limitation to be waived if the 
Board of Directors determines not to oppose the acquisition of an 
Interest exceeding the Concentration Limitation and the waiver has been 
filed as a proposed rule change under Section 19(b) of the Act and 
approved by the Commission.\55\ Nevertheless, the Board of Directors 
may not waive the Concentration Limitation if the person or any of its 
Related Persons seeking to exceed the Concentration Limitation is 
subject to any applicable statutory disqualification or is a member or 
member organization of the Exchange.\56\
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    \53\ See Section 9.8(b) of the LLC Agreement.
    \54\ See Section 9.8(b)(i) of the LLC Agreement.
    \55\ See Section 9.8(b)(ii) of the LLC Agreement.
    \56\ See Section 9.8(b)(iii) of the LLC Agreement.
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    Moreover, the LLC Agreement provides that, if any person, alone or 
together with any Related Person, acquires a direct or indirect 
ownership of 25% or more of the total voting power of a Member (such 
person, a ``Controlling Person,'' and such interest a ``Controlling 
Interest'' \57\), and the Member, alone or together with any Related 
Person, holds an Interest in the Company equal to or greater than 20%, 
then such Controlling Person must become a party to the LLC Agreement 
and abide by its terms.\58\ The LLC Agreement also provides that the 
Exchange must file with the Commission, pursuant to Section 19(b) of 
the Act, any amendment to the LLC Agreement caused by the addition of a 
Controlling Person.\59\ The non-economic rights and privileges, 
including all voting rights, of the Member in which such Controlling 
Interest is acquired would be suspended until the proposed rule change 
has become effective under the Act or until the Controlling Person 
ceased to have a Controlling Interest in such Member.\60\
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    \57\ See Section 2.1 of the LLC Agreement.
    \58\ See Sections 9.8(d)(i) and (ii) of the LLC Agreement.
    \59\ See Section 9.8(d)(iv) of the LLC Agreement.
    \60\ See id.
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    A proposed rule change submitted in any of the circumstances noted 
above would afford the Commission an opportunity to ensure that a 
change to the LLC Agreement or a change in the ownership of the Company 
would be consistent with the Act, including whether the Commission and 
NYSE would retain sufficient regulatory jurisdiction over the proposed 
indirect controlling party. The Commission understands that the LLC 
Agreement would apply to any ultimate parent of the Company, no matter 
how many levels of ownership are involved, provided that a Controlling 
Interest exists between each link of the ownership chain.
    Finally, the LLC Agreement requires the Company to provide the 
Commission with written notice ten days prior to the closing date of 
any acquisition of an Interest by a person that results in a Member's 
percentage ownership interest in the Company, alone or together with 
any Related Person of such Member, meeting or crossing the 5%, 10%, or 
15% thresholds.\61\ This notice requirement is analogous to a 
requirement in Form 1,\62\ the application and amendments to the 
application for registration as a national securities exchange. Exhibit 
K of Form 1 requires any exchange that is a corporation or partnership 
to list any persons that have an ownership interest of 5% or more in 
the exchange.\63\ Additionally, Rule 6a-2(a)(2) under the Act \64\ 
requires an exchange to update its Form 1 within ten days after any 
action that renders inaccurate the information previously filed in 
Exhibit K.
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    \61\ See Section 9.8(a) of the LLC Agreement.
    \62\ 17 CFR 249.1 and 17 CFR 249.1a.
    \63\ This reporting requirement applies only to exchanges that 
have one or more owners, shareholders, or partners that are not also 
members of the exchange. See Form 1, Exhibit K.
    \64\ 17 CFR 240.6a-2(a)(2).
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    Exhibit K imposes no obligation on an exchange to report parties 
whose ownership interest in the exchange is less than 5%. Likewise, the 
Commission does not believe that a change to the LLC Agreement that 
reflects the taking of less than a 5% interest in a facility of a 
national securities exchange (or an increase that does not cross any of 
the additional thresholds) is a ``rule of the exchange'' that must be 
filed pursuant to Section 19(b) of the Act.

D. Ownership Interest of BIDS

    Under this proposal, BIDS would hold a 50% Interest in the Company, 
the operator of NYBX. The Commission has previously expressed concern 
regarding the potential for unfair competition and conflicts of 
interest where a member of an exchange owns more than 20% of

[[Page 5018]]

that exchange or a facility thereof.\65\ Although it is common for a 
member to have an ownership interest in an exchange or a facility of an 
exchange, such member's interest could become so large as to raise 
questions whether the exchange can fairly and objectively exercise its 
self-regulatory responsibilities with respect to that member. A member 
that has a controlling interest in the exchange or a facility might 
attempt to direct the exchange to refrain from diligently surveilling 
the member's conduct or from punishing any improper conduct.
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    \65\ See, e.g., BeX Order, BOX Order, CBSX Order, and ISE Stock 
Order, supra note 17.
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    The Commission believes that BIDS's Interest is consistent with the 
Act because the LLC Agreement is reasonably designed to address these 
concerns. The LLC Agreement provides that if, during at least four of 
the preceding six calendar months, the average daily trading volume in 
NYBX exceeds 10% of the aggregate average daily trading volume of NYSE 
\66\ and a Member (other than NYSE), either alone or together with its 
Related Persons, owns Interests exceeding the Concentration Limitation, 
then, within 180 days: (1) an independent third-party SRO engaged by 
the Company must begin to conduct market surveillance of the Member 
with respect to such Member's trading activity in both NYBX and the 
Exchange; or (2) the Member must reduce its Interest in the Company 
such that it does not exceed the Concentration Limitation.\67\ The 
Commission believes that, if NYBX accounts for a material percentage of 
the Exchange's volume, there is a risk that the Exchange's business 
interests could undermine its ability to vigorously regulate BIDS. The 
LLC Agreement provides for two reasonable ways of addressing that risk: 
(1) require an independent SRO to conduct market surveillance of BIDS 
if NYBX accounts for a material percentage of the Exchange's volume; or 
(2) reduce the business conflict faced by NYSE by requiring BIDS to 
lower its Interest in the Company to below 20%. The Commission further 
believes that 180 days is a reasonable period in which to implement one 
of these two actions.
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    \66\ The aggregate average daily trading volume in NYBX would be 
calculated based upon the trading volume of NYBX itself combined 
with trading volume in the NYSE Display Book that originated in 
NYBX, if any.
    \67\ See Section 9.9 of the LLC Agreement.
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E. NYSE Rule 2B

    NYSE Rule 2B provides, in relevant part, that: ``[w]ithout prior 
SEC approval, the Exchange or any entity with which it is affiliated 
shall not, directly or indirectly, acquire or maintain an ownership 
interest in a member organization. In addition, a member organization 
shall not be or become an affiliate of the Exchange, or an affiliate of 
any affiliate of the Exchange.''\68\ The Exchange, through its wholly 
owned subsidiary NYSE Market, Inc. (``NYSE Market''), a Delaware 
corporation, currently owns 8.75% of the aggregate limited partnership 
interests in BIDS,\69\ which will become a member of NYSE in connection 
with the establishment of NYBX.\70\ In addition, BIDS is an affiliate 
of an affiliate of the Exchange because BIDS and NYSE will each hold a 
50% Interest in the Company.\71\ Thus, both NYSE Market's ownership 
interest in BIDS and BIDS's affiliation with the Company would violate 
NYSE rules, absent Commission approval under Section 19(b) of the Act.
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    \68\ NYSE Rule 2B states that the term ``affiliate'' would have 
the meaning specified in Rule 12b-2 under the Act, 17 CFR 240.12b-2.
    \69\ As a result of this ownership interest, NYSE Market is a 
limited partner in BIDS. The Exchange has stated that it and its 
affiliates do not have any voting or other control arrangements with 
any of the other limited partners or general partner of BIDS. See 
Notice, supra note 3, 73 FR at 71068.
    \70\ See Notice, supra note 3, 73 FR at 71062.
    \71\ Specifically, the Company is an affiliate of the Exchange 
and BIDS is an affiliate of the Company.
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    As part of its proposal, NYSE has requested that the Commission 
approve these two exceptions to Rule 2B, subject to the following 
limitations and conditions:\72\
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    \72\ See Notice, supra note 3, 73 FR at 71068-71069.
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    1. NYSE and the Financial Industry Regulatory Authority (``FINRA'') 
have entered into an agreement pursuant to Rule 17d-2 under the 
Act,\73\ under which FINRA is allocated regulatory responsibilities to 
review BIDS's compliance with certain NYSE rules.\74\
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    \73\ 17 CFR 240.17d-2.
    \74\ NYSE also stated that BIDS is subject to independent 
oversight by FINRA, its Designated Examining Authority, for 
compliance with financial responsibility requirements. See Notice, 
supra note 3, 73 FR at 71068.
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    2. NYSE Regulation will monitor BIDS for compliance with NYSE's 
trading rules and will collect and maintain certain related 
information.\75\
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    \75\ Specifically, NYSE Regulation ``will collect and maintain 
the following information of which NYSE Regulation staff becomes 
aware--namely, all alerts, complaints, investigations and 
enforcement actions where BIDS (in its capacity as an NYSE member) 
is identified as a participant that has potentially violated NYSE or 
applicable SEC rules--in an easily accessible manner so as to 
facilitate any review conducted by the SEC's Office of Compliance 
Inspections and Examination.'' Notice, supra note 3, 73 FR at 71068.
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    3. NYSE Regulation has agreed with NYSE that NYSE Regulation will 
provide a report to NYSE's CRO, on a quarterly basis, that: (i) 
quantifies all alerts (of which NYSE Regulation is aware) that identify 
BIDS as a participant that has potentially violated NYSE or Commission 
rules, and (ii) quantifies the number of all investigations that 
identify BIDS as a participant that has potentially violated NYSE or 
Commission rules.
    4. NYSE has proposed an amendment to Rule 2B (in this filing) that 
will require NYSE and BIDS to establish and maintain procedures and 
internal controls reasonably designed to ensure that BIDS and its 
affiliates do not have access to non-public information relating to the 
Exchange, obtained as a result of its affiliation with NYSE, until such 
information is available generally to similarly situated members of 
NYSE.\76\ Under the proposed rule, BIDS and its affiliates may have 
access to non-public information relating to the parties' obligations 
under the LLC Agreement, and such non-public information shall be kept 
confidential in accordance with Section 14.1 of the LLC Agreement.\77\
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    \76\ See proposed NYSE Rule 2B, commentary.01.
    \77\ See id. See also supra notes 22 and 23 and accompanying 
text.
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    5. Section 9.9 of the LLC Agreement provides that if, during at 
least four of the preceding six calendar months, the average daily 
trading volume in NYBX exceeds 10% of the aggregate daily trading 
volume of NYSE, then, within 180 days, either an independent third-
party SRO engaged by the Company must begin to conduct surveillance of 
BIDS with respect to BIDS's trading activity in both NYBX and NYSE, or 
BIDS must reduce its interest in the Company such that it does not 
exceed the Concentration Limitation.\78\
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    \78\ See supra notes 53 to 56 and accompanying text for a 
discussion of the Concentration Limitation.
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    6. NYSE Market currently owns less than a 9% equity interest in 
BIDS and does not have any veto or other special voting rights with 
respect to the management or operation of BIDS. NYSE, or any of its 
affiliates, may not directly or indirectly increase such equity 
interest without prior Commission approval.
    7. The proposed exception from NYSE Rule 2B to permit NYSE's 
ownership interest in BIDS and BIDS's affiliation with the Company 
(which is an affiliate of NYSE) would be for a pilot period of 12 
months.
    The Commission finds that the proposed exception from NYSE Rule 2B 
to permit NYSE's ownership interest in BIDS and BIDS's affiliation with 
the Company is consistent with the Act. In

[[Page 5019]]

particular, the Commission finds that the proposal is consistent with 
Section 6(b)(5) of the Act,\79\ which requires, among other things, 
that the rules of an exchange be designed to prevent fraudulent and 
manipulative acts and practices; to promote just and equitable 
principles of trade; to foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities; 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; and are not designed to 
permit unfair discrimination between customers, issuers, brokers, or 
dealers.
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    \79\ 15 U.S.C. 78f(b)(5).
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    In the past, the Commission has expressed concern that the 
affiliation of an exchange with one of its members raises potential 
conflicts of interest and the potential for unfair competitive 
advantage.\80\ NYSE Market's ownership interest in BIDS and the joint 
ownership of the Company by NYSE and BIDS raise similar concerns. The 
Commission continues to be concerned about potential unfair competition 
and conflicts of interest between an exchange's self-regulatory 
obligations and its commercial interest when the exchange holds an 
ownership interest in a member or is affiliated with one of its 
members.
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    \80\ See, e.g., Securities Exchange Act Release Nos. 54170 (July 
18, 2006), 71 FR 42149 (July 25, 2006) (SR-NASDAQ-2006-006) (order 
approving Nasdaq's proposal to adopt Nasdaq Rule 2140, restricting 
affiliations between Nasdaq and its members); 53382 (February 27, 
2006), 71 FR 11251 (March 6, 2006) (SR-NYSE-2005-77) (order 
approving combination of NYSE and Archipelago Holdings, Inc.); and 
58673 (September 29, 2008), 73 FR 57707 (October 3, 2008) (SR-Amex-
2008-62) (order approving acquisition of the American Stock Exchange 
by NYSE Euronext).
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    Nevertheless, in view of the conditions described above, the 
Commission believes that it is consistent with the Act to permit the 
proposed exceptions to NYSE Rule 2B. These conditions appear reasonably 
designed to mitigate concerns about potential conflicts of interest and 
unfair competitive advantage. FINRA will conduct member regulation of 
BIDS and--if trading volume from the facility grows sufficiently large 
and BIDS does not wish to reduce its ownership interest in the 
Company--might also be required to conduct market regulation of BIDS. 
Furthermore, NYSE's CRO will be provided quarterly reports of any 
alerts or investigations relating to BIDS. These conditions appear 
reasonably designed to promote robust and independent regulation of 
BIDS. NYSE and BIDS also must establish and maintain procedures and 
internal controls that are reasonably designed to prevent BIDS and its 
affiliates from deriving any unfair informational advantage resulting 
from its affiliation with NYSE. Finally, NYSE has proposed that the 
exception from NYSE Rule 2B be on a pilot basis, which will provide 
NYSE and the Commission an opportunity to assess whether there might be 
any adverse consequences of the exception and whether a permanent 
exception is warranted. The Commission believes that, taken together, 
these conditions are reasonably designed to mitigate potential 
conflicts between the Exchange's commercial interest in BIDS and its 
regulatory responsibilities with respect to BIDS.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\81\ that the proposed rule change (SR-NYSE-2008-120) be, and it 
hereby is, approved.
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    \81\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\82\
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    \82\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E9-1806 Filed 1-27-09; 8:45 am]

BILLING CODE 8011-01-P