Document ID: SEC-2005-0293-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: Pacific Exchange, Inc.
Posted Date: 2005-11-29T05:00Z

[Federal Register: November 29, 2005 (Volume 70, Number 228)]
[Notices]               
[Page 71592-71595]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr29no05-117]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52811; File No. SR-PCX-2005-125]

 
Self-Regulatory Organizations; Pacific Exchange, Inc.; Notice of 
Filing and Order Granting Accelerated Approval of Proposed Rule Change 
To Extend Certain Exceptions From the Voting and Ownership Limitations 
in the Certificate of Incorporation of PCX Holdings, Inc.

November 21, 2005.
    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 November 15, 2005, the Pacific Exchange, Inc. (``PCX'' or the 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by PCX. The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons, and is approving the proposal on an 
accelerated basis.
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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

    PCX hereby submits to the Commission a proposed rule change to 
extend certain exceptions from the voting and ownership limitations in 
the certificate of incorporation of PCX Holdings, Inc. (``PCXH''), a 
Delaware corporation and the parent company of PCX, approved by the 
Commission in an order issued on September 22, 2005,\3\ so as to allow 
Archipelago Holdings, Inc. (``Archipelago''), a Delaware corporation 
and the ultimate parent company of PCXH and PCX, to continue to (i) own 
and operate the ATS OTC Function (as defined below) of its wholly-owned 
subsidiary, Archipelago Trading Services, Inc. (``Arca Trading''), and 
(ii) until the closing of the proposed business combination of 
Archipelago and the New York Stock Exchange, Inc. (the ``NYSE''), a New 
York not-for-profit corporation (the ``Proposed Archipelago NYSE 
Merger''), own and operate the DOT Function (as defined below) of its 
wholly-owned subsidiary, Archipelago Securities, L.L.C. (``Archipelago 
Securities'').
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    \3\ See Securities Exchange Act Release No. 52497 (September 22, 
2005), 70 FR 56949 (September 29, 2005) (``Order Approving SR-PCX-
2005-90'').
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II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, PCX 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 III below. The self-regulatory organization has prepared 
summaries, set forth in sections A, B and C below, of the most 
significant aspects of such statements.

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

1. Purpose
a. PCXH Acquisition and the Amendment of the PCXH Certificate of 
Incorporation
    On September 26, 2005, Archipelago completed its acquisition of 
PCXH and all of its wholly-owned subsidiaries, including PCX and PCX 
Equities, Inc. (``PCXE'') (the ``PCXH Acquisition''). The PCXH 
Acquisition was accomplished by way of a merger of PCXH with a wholly-
owned subsidiary of Archipelago, with PCXH being the surviving 
corporation in the merger and becoming a wholly-owned subsidiary of 
Archipelago.
    The certificate of incorporation of PCXH (as amended to date, the 
``PCXH Certificate of Incorporation'') contains various ownership and 
voting restrictions on PCXH's capital stock, which are designed to 
safeguard the independence of the self-regulatory functions of PCX and 
to protect the Commission's oversight responsibilities. In order to 
allow Archipelago to own 100% of the capital stock of PCXH, prior to 
the completion of the PCXH Acquisition, PCX filed with the Commission a 
proposed rule change which sought to, among other things, amend the 
PCXH Certificate of Incorporation to create an exception from the 
voting and ownership restrictions for Archipelago and certain of its 
related persons (the ``Original Rule Filing'').\4\ The Original Rule 
Filing, as amended by Amendment No. 1 and Amendment No. 2 thereto, was 
approved by the Commission on September 22, 2005 \5\ and the amended 
PCXH Certificate of Incorporation became effective on September 26, 
2005, upon the closing of the PCXH Acquisition.
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    \4\ See Pacific Exchange, Inc., Proposed Rule Change Relating to 
the Certificate of Incorporation of PCX Holdings, Inc., PCX Rules, 
and Bylaws of Archipelago Holdings, Inc., File No. SR-PCX-2005-90 
(August 1, 2005).
    \5\ See Order Approving SR-PCX-2005-90.
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    Article Nine of the PCXH Certificate of Incorporation provides that 
no Person,\6\ either alone or together with its Related Persons,\7\ may 
own, directly or indirectly, shares constituting more than 40% of the 
outstanding shares of any class of PCXH capital stock,\8\ and that no 
Person, either alone or together with its Related Persons who is a 
trading permit holder of PCX or an equities trading permit holder of 
PCXE, may own, directly or indirectly, shares

[[Page 71593]]

constituting more than 20% of any class of PCXH capital stock.\9\ 
Furthermore, the PCXH Certificate of Incorporation provides that, for 
so long as PCXH controls, directly or indirectly, PCX, no Person, 
either alone or with its Related Persons, may directly or indirectly 
vote or cause the voting of shares of PCXH capital stock or give any 
proxy or consent with respect to shares representing more than 20% of 
the voting power of the issued and outstanding PCXH capital stock.\10\ 
The PCXH Certificate of Incorporation also places limitations on the 
right of any Person, either alone or with its Related Persons, to enter 
into any agreement with respect to the withholding of any vote or 
proxy.\11\
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    \6\ ``Person'' is defined to mean an individual, partnership 
(general or limited), joint stock company, corporation, limited 
liability company, trust or unincorporated organization, or any 
governmental entity or agency or political subdivision thereof. PCXH 
Certificate of Incorporation, Article Nine, section 1(b)(iv).
    \7\ The term ``Related Person,'' as defined in the PCXH 
Certificate of Incorporation, means (i) with respect to any person, 
all ``affiliates'' and ``associates'' of such person (as such terms 
are defined in Rule 12b-2 under the Act; (ii) with respect to any 
person constituting a trading permit holder of PCX or an equities 
trading permit holder of PCXE, any broker dealer with which such 
holder is associated; and (iii) any two or more persons that have 
any agreement, arrangement or understanding (whether or not in 
writing) to act together for the purpose of acquiring, voting, 
holding or disposing of shares of the capital stock of PCXH. PCXH 
Certificate of Incorporation, Article Nine, section 1(b)(iv).
    \8\ PCXH Certificate of Incorporation, Article Nine, section 
1(b)(i). However, such restriction may be waived by the Board of 
Directors of PCXH pursuant to an amendment to the Bylaws of PCXH 
adopted by the Board of Directors, if, in connection with the 
adoption of such amendment, the Board of Directors adopts a 
resolution stating that it is the determination of such Board that 
such amendment will not impair the ability of PCX to carry out its 
functions and responsibilities as an ``exchange'' under the Act and 
is otherwise in the best interests of PCXH and its stockholders and 
PCX, and will not impair the ability of the Commission to enforce 
said Act, and such amendment shall not be effective until approved 
by said Commission; provided that the Board of Directors of PCXH 
shall have determined that such Person and its Related Persons are 
not subject to any applicable ``statutory disqualification'' (within 
the meaning of section 3(a)(39) of the Act). PCXH Certificate of 
Incorporation, Article Nine, sections 1(b)(i)(B) and 1(b)(i)(C).
    \9\ PCXH Certificate of Incorporation, Article Nine, section 
1(b)(ii).
    \10\ PCXH Certificate of Incorporation, Article Nine, section 
1(c).
    \11\ Id.
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    PCX proposed (and the Commission approved) an exception from the 
ownership and voting limitations described above by adding a new 
paragraph at the end of Article Nine of the PCXH Certificate of 
Incorporation, which provides that for so long as Archipelago directly 
owns all of the outstanding capital stock of PCXH, these ownership and 
voting limitations shall not be applicable to the ownership and voting 
of shares of PCXH by (i) Archipelago, (ii) any Person that is a Related 
Person of Archipelago, either alone or together with its Related 
Persons, and (iii) any other Person to which Archipelago is a Related 
Person, either alone or together with its Related Persons.\12\ These 
exceptions to the ownership and voting limitations, however, shall not 
apply to any ``Prohibited Persons,'' \13\ which is defined to mean any 
Person that is, or that has a Related Person that is (i) an OTP Holder 
or an OTP Firm (as defined in the rules of PCX) \14\ or (ii) an ETP 
Holder (as defined in the rules of PCXE),\15\ unless such Person is 
also a ``Permitted Person'' under the PCXH Certificate of 
Incorporation.\16\ The PCXH Certificate of Incorporation further 
provides that any Prohibited Person not covered by the definition of a 
Permitted Person who is subject to and exceeds the voting and ownership 
limitations imposed by Article Nine as of the date of the closing of 
the PCXH Acquisition shall be permitted to exceed the voting and 
ownership limitations imposed by Article Nine only to the extent and 
for the time period approved by the Commission.\17\
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    \12\ PCXH Certificate of Incorporation, Article Nine, Section 4.
    \13\ Id.
    \14\ PCX rules define an ``OTP Holder'' to mean any natural 
person, in good standing, who has been issued an Options Trading 
Permit (``OTP'') by the Exchange for effecting approved securities 
transactions on the Exchange's trading facilities, or has been named 
as a Nominee. PCX Rule 1.1(q). The term ``Nominee'' means an 
individual who is authorized by an ``OTP Firm'' (a sole 
proprietorship, partnership, corporation, limited liability company 
or other organization in good standing who holds an OTP or upon whom 
an individual OTP Holder has conferred trading privileges on the 
Exchange's trading facilities) to conduct business on the Exchange's 
trading facilities and to represent such OTP Firm in all matters 
relating to the Exchange. PCX Rule 1.1(n).
    \15\ PCXE rules define an ``ETP Holder'' to mean any sole 
proprietorship, partnership, corporation, limited liability company 
or other organization in good standing that has been issued an 
Equity Trading Permit, a permit issued by the PCXE for effecting 
approved securities transactions on the trading facilities of PCXE. 
PCXE Rule 1.1(n).
    \16\ ``Permitted Person'' is defined to mean (A) any broker or 
dealer approved by the Commission after June 20, 2005 to be a 
facility (as defined in Section 3(a)(2) of the Act) of PCX; (B) any 
Person that has been approved by the Commission prior to it becoming 
subject to the provisions of Article Nine of the PCXH Certificate of 
Incorporation with respect to the voting and ownership of shares of 
PCXH capital stock by such Person; and (C) any Person that is a 
Related Person of Archipelago solely by reason of beneficially 
owning, either alone or together with its Related Persons, less than 
20% of the outstanding shares of Archipelago capital stock. PCXH 
Certificate of Incorporation, Article Nine, section 4.
    \17\ Id.
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b. ATS OTC Function
    Arca Trading is a broker-dealer and an ETP Holder of PCXE. The 
business of Arca Trading includes, among other things, the operation of 
an alternative trading system (``ATS'') (as defined in Regulation ATS 
promulgated by the Commission under the Act) \18\ for trading of over-
the-counter bulletin board securities that are not traded on any 
securities exchange or Nasdaq (including, for the avoidance of doubt, 
The NASDAQ National Market and The NASDAQ SmallCap Market) (such 
function was referred to as the ``ATS OTC Function'' in the Order 
Approving SR-PCX-2005-90). Because Arca Trading is a broker-dealer and 
an ETP Holder, and a wholly-owned subsidiary and, consequently, a 
Related Person, of Archipelago, it falls within the definition of 
``Prohibited Persons.'' Absent an exception, Archipelago's ownership of 
PCXH would cause Arca Trading to exceed the voting and ownership 
limitations imposed by Article Nine of the PCXH Certificate of 
Incorporation. Therefore, in connection with the PCXH Acquisition, PCX 
requested an exception on a pilot basis for Arca Trading from the 
ownership and voting limitations in the PCX Certificate of 
Incorporation for Archipelago's ownership and operation of the ATS OTC 
Function of Arca Trading.\19\ The Commission approved PCX's proposal 
and allowed Archipelago to continue to own and operate the ATS OTC 
Function of Arca Trading for a period of 60 days following the closing 
of the PCXH Acquisition.\20\ The pilot approval was designed to provide 
the public and other interested parties the opportunity to comment on 
the exception before the exception being made permanent. In the Order 
Approving SR-PCX-2005-90, the Commission specifically noted that in its 
adoption of Regulation ATS, it had stated that exchanges could form 
subsidiaries that operate ATSs registered as broker-dealers and that 
such subsidiaries would of course be required to become members of a 
national securities association or another national securities 
exchange.\21\
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    \18\ 17 CFR 242.300 through 17 CFR 242.303.
    \19\ See Amendment No. 2 to the Original Rule Filing (File 
Number SR-PCX-2005-90), at 6 (September 16, 2005) (``Amendment No. 
2'').
    \20\ See Order Approving SR-PCX-2005-90, at 56960.
    \21\ Id. at 56959. The Commission also noted in the Order 
Approving SR-PCX-2005-90 that in adopting Regulation ATS, the 
Commission stated that any subsidiary or affiliate ATS could not 
integrate, or otherwise link the ATS with the exchange, including 
using the premises or property of such exchange for effecting or 
reporting a transaction, without being considered a facility of the 
exchange. Id.
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c. DOT Function of Archipelago Securities
    Archipelago Securities is a registered broker-dealer, a member of 
the National Association of Securities Dealers, Inc. and an ETP Holder 
of PCXE. Among other things, Archipelago Securities engages in the 
business of providing broker-dealer clients with direct connectivity, 
through the NYSE Designated Order Turnaround System, to the NYSE (such 
function was referred to as the ``DOT Function'' in the Order Approving 
SR-PCX-2005-90). Because Archipelago Securities is a broker-dealer and 
an ETP Holder, and a wholly-owned subsidiary and, consequently, a 
Related Person, of Archipelago, it falls within the definition of 
``Prohibited Persons.'' Absent an exception, Archipelago's ownership of 
PCXH would cause Archipelago Securities to exceed the voting and 
ownership limitations imposed by Article Nine of the PCXH Certificate 
of Incorporation. Therefore, in connection with the PCXH Acquisition, 
PCX requested an exception on a pilot basis for Archipelago Securities 
from the ownership and voting limitations for Archipelago's ownership 
and operation

[[Page 71594]]

of the DOT Function of Archipelago Securities, on the condition that in 
no event would Archipelago or PCX request that this exception be 
extended beyond the completion of the Proposed Archipelago NYSE 
Merger.\22\ In the Order Approving SR-PCX-2005-90, the Commission 
approved PCX's request for Archipelago to continue to own and operate 
the DOT Function of Archipelago Securities until the earlier of a 
period of 60 days following the closing of the PCXH Acquisition and the 
closing of the Proposed Archipelago NYSE Merger.\23\
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    \22\ See Amendment No. 2, at 7.
    \23\ See Order Approving SR-PCX-2005-90, at 56960.
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d. Requests for Approval
    Because the PCXH Acquisition was consummated on September 26, 2005, 
the temporary approvals with respect to the ATS OTC Function of Arca 
Trading and the DOT Function of Archipelago Securities will expire on 
November 25, 2005. The Exchange hereby submits to the Commission the 
following requests:
    (i) The Exchange hereby requests that the Commission approve 
Archipelago's ownership and operation of the ATS OTC function of Arca 
Trading on a permanent basis. Without the Commission's approval sought 
hereby, upon the expiration of the 60 day pilot approval, Archipelago's 
ownership of PCXH would cause Arca Trading to exceed the voting and 
ownership limitations imposed by Article Nine of the PCXH Certificate 
of Incorporation because ATS, a broker-dealer and an ETP Holder of 
PCXE, is a wholly owned subsidiary and, consequently, a Related Person, 
of Archipelago.
    (ii) The Exchange hereby requests that the Commission approve an 
extension of the pilot approval with respect to Archipelago's ownership 
and operation of the DOT Function of Archipelago Securities until the 
closing of the Proposed Archipelago NYSE Merger. Without the 
Commission's approval sought hereby, upon the expiration of the 60 day 
pilot approval, Archipelago's ownership of PCXH would cause Archipelago 
Securities to exceed the voting and ownership limitations imposed by 
Article Nine of the PCXH Certificate of Incorporation because 
Archipelago Securities, a broker-dealer and an ETP Holder of PCXE, is a 
wholly owned subsidiary and, consequently, a Related Person, of 
Archipelago and the approval of the other functions of Archipelago 
Securities granted by the Commission previously were limited in scope 
and did not include its DOT Function.
2. Basis
    The Exchange believes that the proposed rule change in this filing 
is consistent with section 6(b) of the Act,\24\ in general, and 
furthers the objectives of section 6(b)(1),\25\ in particular, in that 
it enables the Exchange to be so organized so as to have the capacity 
to be able to carry out the purposes of the Act and to comply, and 
(subject to any rule or order of the Commission pursuant to section 
17(d) or 19(g)(2) of the Act) to enforce compliance by its exchange 
members and Persons associated with its exchange members, with the 
provisions of the Act, the rules and regulations thereunder, and the 
rules of the Exchange. The Exchange also believes that this filing 
furthers the objectives of section 6(b)(5),\26\ in particular, because 
the rules summarized herein would create a governance and regulatory 
structure with respect to the operation of the business of PCX \27\ 
that is designed to help prevent fraudulent and manipulative acts and 
practices; to promote just and equitable principals of trade; to foster 
cooperation and coordination with Persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities; and 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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    \24\ 15 U.S.C. 78f(b).
    \25\ 15 U.S.C. 78f(b)(1).
    \26\ 15 U.S.C. 78f(b)(5).
    \27\ PCX clarified that the governance and regulatory structure 
created by the proposal relates to the operation of PCX's business 
generally, not only to its options business. Telephone conversation 
between Janet Angstadt, Deputy General Counsel and Assistant 
Corporate Secretary, PCX and Jennifer Dodd, Special Counsel, 
Division of Market Regulation, Commission, on November 21, 2005.
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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 that is not necessary or appropriate 
in furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments on the proposed rule change were neither solicited 
nor received.

III. 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-PCX-2005-125 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-9303.
    All submissions should refer to File Number SR-PCX-2005-125. 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. Copies of such 
filing also will be available for inspection and copying at the 
principal office of PCX. All comments received will be posted without 
change; the Commission does not edit personal identifying information 
from submissions. You should submit only information that you wish to 
make available publicly. All submissions should refer to File Number 
SR-PCX-2005-125 and should be submitted on or before December 20, 2005.

IV. Discussion of Commission Findings and Order Granting Accelerated 
Approval of Proposed Rule Change

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national

[[Page 71595]]

securities exchange.\28\ In particular, the Commission finds that the 
proposal is consistent with section 6(b)(1) of the Act,\29\ which 
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 or regulations thereunder, and the 
rules of the exchange. The Commission also finds that the proposal is 
consistent with section 6(b)(5) of the Act,\30\ which requires, among 
other things, that the rules of an exchange be designed to promote just 
and equitable principles of trade, to facilitate transactions in 
securities, to remove impediments to and perfect the mechanisms 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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    \28\ 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).
    \29\ 15 U.S.C. 78f(b)(1).
    \30\ 15 U.S.C. 78f(b)(5).
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    Pursuant to section 19(b)(2) of the Act,\31\ the Commission may not 
approve any proposed rule change, or amendment thereto, prior to the 
thirtieth day after the date of publication of the notice thereof, 
unless the Commission find good cause for so doing. The Commission 
hereby finds good cause for approving the proposed rule change prior to 
the thirtieth day after publishing notice thereof in the Federal 
Register pursuant to section 19(b)(2) of the Act.\32\ The Commission 
believes that the requested extensions are consistent with the terms 
and conditions set forth in the Order Approving SR-PCX-2005-90, and 
notes that in its filing, PCX represented that accelerated 
effectiveness of the proposed rule change before the expiration of the 
pilot approvals would provide continuity of Archipelago's operation of 
the ATS OTC Function and DOT Function. The Commission also notes that 
the proposed changes are extensions of exceptions that the Commission 
approved on a pilot basis in the Order Approving SR-PCX-2005-90 and, as 
such, do not raise any new or novel issues. The pilots are both 
currently set to expire on November 25, 2005. Permitting PCX to extend 
the pilots will permit Archipelago to avoid disruption of its operation 
of the ATS OTC Function and the DOT Function. Furthermore, the 
Commission notes that after the publication of the pilot approvals in 
the Federal Register, the Commission did not receive any comment with 
respect to Archipelago's ownership and operation of the ATS OTC 
Function of Arca Trading and the DOT Function of Archipelago 
Securities.
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    \31\ 15 U.S.C. 78s(b)(2).
    \32\ Id.
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    For the foregoing reasons, the Commission finds that the proposed 
rule change is consistent with the requirements of the Act the rules 
and regulations thereunder, and finds that good cause exists to 
accelerate approval of the proposed rule change, pursuant to section 
19(b)(2) of the Act.\33\
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    \33\ Id.
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V. Conclusion

    It Is Therefore Ordered, pursuant to section 19(b)(2) of the 
Act,\34\ that the proposed rule change (SR-PCX-2005-125) is approved on 
an accelerated basis. Specifically, a permanent exception for the ATS 
OTC Function of Arca Trading is approved; and the exception for the DOT 
Function of Archipelago Securities is approved on a pilot basis until 
the closing date of the Proposed Archipelago NYSE Merger.
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    \34\ Id.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\35\
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    \35\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. E5-6624 Filed 11-28-05; 8:45 am]

BILLING CODE 8010-01-P