Document ID: SEC-2008-1032-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Philadelphia Stock Exchange, Inc.
Posted Date: 2008-07-23T04:00Z

[Federal Register: July 23, 2008 (Volume 73, Number 142)]
[Notices]               
[Page 42874-42888]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr23jy08-88]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58179; File No. SR-Phlx-2008-31]

 
Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Notice of Filing of Amendment No. 2 and Order Granting Accelerated 
Approval to a Proposed Rule Change, as Modified by Amendments No. 1 and 
2 Thereto, Relating to Changes to Phlx's Governing Documents in 
Connection With the Acquisition of Phlx by The NASDAQ OMX Group, Inc.

July 17, 2008.

I. Introduction

    On April 21, 2008, the Philadelphia Stock Exchange, Inc. (``Phlx'' 
or ``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change in connection with the acquisition of the Exchange 
by The Nasdaq Stock Market, Inc., now known as The NASDAQ OMX Group, 
Inc. (``NASDAQ OMX''). On April 29, 2008, the proposed rule change was 
published for comment in the Federal Register.\3\ The Exchange filed 
Amendment Nos. 1 and 2 to the proposed rule change on May 30, 2008 and 
July 2, 2008, respectively.\4\ The Commission received no comments on 
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. 57703 (April 23, 
2008), 73 FR 23293 (``Notice'').
    \4\ In Amendment No. 1, Phlx represented that, on May 6, 2008, 
the Exchange obtained shareholder approval of the proposed rule 
change, as required by Delaware General Corporation Law, and that no 
further action by the Exchange in connection with the proposed rule 
change is required. See also General Instruction E to Form 19b-4 
(concerning completion of action by a self-regulatory organization 
on a proposed rule change). Phlx also clarified that routing by 
NASDAQ Execution Services, LLC (``NES'') to Phlx, on behalf of The 
NASDAQ Stock Market LLC (``NASDAQ Exchange''), takes two forms. 
Amendment No. 1 is technical in nature, and therefore is not subject 
to notice and comment.
    In Amendment No. 2, Phlx filed the complete Certificate of 
Incorporation and amended By-Laws of NASDAQ OMX in order to propose 
their adoption as rules of Phlx. The By-Laws contained minor 
amendments to terminology to apply to Phlx all of the same 
provisions that are currently specifically applicable to the NASDAQ 
Exchange. The amended By-Laws were published for comment in a 
separate NASDAQ Exchange filing. See Securities Exchange Act Release 
No. 57761 (May 1, 2008), 73 FR 26182 (May 8, 2008) (notice of SR-
NASDAQ-2008-035) (``Nasdaq Stock Market Proposal'').
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    This order provides notice of filing of Amendment No. 2 to the 
proposed rule change, and grants accelerated approval to the proposed 
rule change, as modified by Amendments Nos. 1 and 2.

II. Background

    On November 7, 2007, NASDAQ OMX announced that it had entered into 
an agreement with the Exchange, pursuant to which NASDAQ OMX would 
acquire all of the common stock of the Exchange.\5\ Phlx shareholders 
would receive cash consideration for their common stock and would not 
retain any ownership interest in the Exchange.
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    \5\ The Exchange demutualized in 2004, though it is not publicly 
traded. See Securities Exchange Act Release No. 49098 (January 16, 
2004), 69 FR 3974 (January 27, 2004) (SR-PHLX-2003-73) (approval 
order).
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    The proposed acquisition would be effected through the merger of 
Pinnacle Merger Corporation, Inc. (``Merger Subsidiary''), a Delaware 
corporation and wholly-owned subsidiary of NASDAQ OMX, with and into 
the Exchange, with the Exchange surviving the merger (the 
``Merger'').\6\ The members of the board of directors of Merger 
Subsidiary would be selected by NASDAQ OMX from among the current 
Governors of the Exchange and would become the Board of Governors of 
Phlx (``Board'') immediately after the effective time of the Merger.\7\ 
The Exchange represents that the directors of Merger Subsidiary, and 
therefore the new Board, would satisfy the compositional requirements 
of the new Board, discussed below.\8\
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    \6\ See proposed Section 1-1(ii) of the By-Laws (defining 
``NASDAQ OMX Merger'').
    \7\ See proposed Section 4-3(b) of the By-Laws and Notice, supra 
note 3, 73 FR at 23295.
    \8\ See infra notes 61-69 and accompanying text (discussing 
proposed compositional requirements of the Board).
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    After the Merger, the Exchange would be a wholly-owned subsidiary 
of NASDAQ OMX.\9\ NASDAQ OMX would operate the Exchange as a separate 
self-regulatory organization (``SRO''). Accordingly, Phlx would 
maintain its current registration as a national securities exchange, 
and maintain separate rules, membership rosters, and listings that 
would be distinct from the rules, membership rosters, and listings of 
NASDAQ OMX's other national securities exchanges. Additionally, after 
the Merger, the Exchange would continue to operate the Stock Clearing 
Corporation of Philadelphia (``SCCP''),\10\ its wholly-owned clearing 
agency, and The Philadelphia Board of Trade (``PBOT''), its wholly-
owned futures exchange subsidiary. Separately, NASDAQ OMX also entered 
into an agreement with the Boston Stock Exchange, Inc. (``BSE''), 
pursuant to which NASDAQ OMX would acquire all of the outstanding 
membership interests in BSE (``BSE Acquisition'').\11\ Following the 
closing of the BSE Acquisition and the Merger, NASDAQ OMX will be the 
sole owner of five SROs: NASDAQ Exchange, BSE, the

[[Page 42875]]

Boston Stock Exchange Clearing Corporation (``BSECC''), Phlx, and SCCP 
(collectively, ``SRO Subsidiaries'').
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    \9\ The Exchange would have a single class of common stock, all 
of which would be held by NASDAQ OMX.
    \10\ See Securities Exchange Act Release No. 58180 (July 17, 
2008) (SR-SCCP-2008-01) (approving changes to SCCP's articles of 
incorporation, including language clarifying that all of the 
authorized shares of SCCP common stock are issued and outstanding 
and are held by Phlx).
    \11\ See Securities Exchange Act Release No. 57757 (May 1, 
2008), 73 FR 26159 (SR-BSE-2008-23) (notice of proposed rule change 
related to BSE Acquisition); Securities Exchange Act Release No. 
57782 (May 6, 2008), 73 FR 27583 (May 13, 2008) (SR-BSECC-2008-01) 
(notice of proposal to amend the articles of organization and by-
laws of the BSECC to reflect its proposed acquisition by NASDAQ 
OMX).
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    In the present filing, the Exchange has proposed to amend its 
certificate of incorporation (``Certificate''), by-laws (``By-Laws''), 
and certain rules (``Rules'') to reflect NASDAQ OMX's proposed 
ownership of the Exchange. In general, the proposed changes are 
designed to address the Exchange's proposed new ownership structure and 
conform Phlx's governance provisions to those that are currently 
applicable to the NASDAQ Exchange. The Exchange is also using this 
opportunity to make several other changes to its governing documents to 
update certain language and make other minor changes that are not 
directly related to the proposed Merger.\12\
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    \12\ For example, as discussed in Section III.E.6, infra, the 
language relating to how the Exchange's Weekly Bulletin is 
distributed would be updated to not restrict its distribution to 
mail, but rather to permit distribution by e-mail and posting on the 
Exchange's Web site. See Section 12-5(d) of the By-Laws.
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    In addition, NASDAQ OMX has amended its By-Laws to make applicable 
to all of NASDAQ OMX's SRO subsidiaries, including Phlx and SCCP (after 
the Merger), certain provisions of NASDAQ OMX's Restated Certificate of 
Incorporation and NASDAQ OMX's By-Laws. These provisions of NASDAQ 
OMX's governing documents are designed to maintain the independence of 
each SRO subsidiary's self-regulatory function, enable each SRO 
subsidiary to operate in a manner that complies with the federal 
securities laws, and facilitate the ability of each SRO subsidiary and 
the Commission to fulfill their regulatory and oversight obligations 
under the Act.\13\
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    \13\ See Amendment No. 2, supra note 4 (including the amended 
By-Laws of NASDAQ OMX to the Phlx's proposal).
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III. Discussion

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\14\ In particular, the Commission finds that the proposed 
rule change is consistent with: (1) Section 6(b)(1) of the Act,\15\ 
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; (2) Section 6(b)(3) of the Act,\16\ which 
requires that the rules of a national securities exchange assure the 
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 (the ``fair 
representation requirement''); and (3) Section 6(b)(5) of the Act,\17\ 
in that it is designed, among other things, to prevent fraudulent and 
manipulative acts and practices; to promote just and equitable 
principles of trade; to remove impediments to and perfect the mechanism 
of a free and open market and a national market system; and, in 
general, to protect investors and the public interest.
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    \14\ 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).
    \15\ 15 U.S.C. 78f(b)(1).
    \16\ 15 U.S.C. 78f(b)(3).
    \17\ 15 U.S.C. 78f(b)(5).
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    As noted above, the Merger would result in NASDAQ OMX owning two 
additional SROs (Phlx and SCCP). The Commission believes that the 
ownership of Phlx and SCCP by the same public holding company that owns 
the NASDAQ Exchange would not impose any burden on competition not 
necessary or appropriate in furtherance of the purposes of the Act.\18\ 
Further, the Commission does not believe that the ownership by one 
holding company of two exchanges and one clearing agency presents any 
adverse competitive implications in the current marketplace. The 
Commission notes that it has previously approved proposals in which a 
holding company owns multiple SROs.\19\ The Commission continues to 
monitor such entities and notes that its experience to date with the 
issues raised by this ownership structure has not presented any 
concerns that have not been addressed, for example by the protections 
afforded at the holding company level.
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    \18\ 15 U.S.C. 78f(b)(8) and 15 U.S.C. 78q-1(b)(3)(I).
    \19\ See, e.g., Securities Exchange Act Release No. 53382 
(February 27, 2006), 71 FR 11251 (March 6, 2006) (SR-NYSE-2005-77) 
(approving the combination of the New York Stock Exchange, Inc. and 
Archipelago Holdings, Inc.).
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    In particular, as discussed below, though NASDAQ OMX is not itself 
an SRO, its activities with respect to the operation of Phlx and SCCP 
must be consistent with, and must not interfere with, the self-
regulatory obligations of Phlx and SCCP.\20\ Further, certain 
provisions of NASDAQ OMX's Certificate of Incorporation and By-Laws are 
rules of an exchange if they are stated policies, practice, or 
interpretations, as defined in Rule 19b-4 under the Act, of the 
exchange, and must be filed with the Commission pursuant to Section 
19(b) of the Act and Rule 19b-4 thereunder.\21\ Accordingly, Phlx has 
filed with the Commission the Certificate and amended By-Laws of NASDAQ 
OMX. Notably, NASDAQ OMX's amended By-Laws would make applicable to all 
of NASDAQ OMX's SRO subsidiaries, including Phlx and SCCP (after the 
Merger), certain provisions of NASDAQ OMX's Restated Certificate of 
Incorporation and NASDAQ OMX's By-Laws that are designed to maintain 
the independence of each of its SRO subsidiaries' self-regulatory 
function. These provisions facilitate the ability of each SRO 
subsidiary and the Commission to fulfill their regulatory and oversight 
obligations under the Act.
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    \20\ See infra Section III.C.1 (discussing the relationship 
between NASDAQ OMX and Phlx).
    \21\ 15 U.S.C. 78s(b) and 17 CFR 240.19b-4, respectively.
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    Furthermore, the Commission believes that there is robust 
competition among market centers, as exchanges face increasing 
competition from non-exchange entities that trade the same or similar 
financial instruments, such as alternative trading systems.\22\ In 
addition, despite consolidation among exchanges, other entities have 
recently applied for exchange registration, which evidences the 
continued ability of entities to enter the marketplace and further 
increase competition among SROs.\23\ Accordingly, as described above, 
the Commission does not believe that ownership by a single holding 
company of multiple SROs presents any burden on competition in 
violation of the Act.\24\ Nevertheless, the Commission

[[Page 42876]]

will continue to monitor SROs, including those that are under common 
ownership, for compliance with the Act and the rules and regulations 
thereunder, as well as the SROs' own rules.
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    \22\ See, e.g., Securities Exchange Act Release No. 58092 (July 
3, 2008), 73 FR 40144, 40144 (July 11, 2008) (where the Commission 
recognized that ``[n]ational securities exchanges registered under 
Section 6(a) of the Exchange Act face increased competitive 
pressures from entities that trade the same or similar financial 
instruments * * *'').
    \23\ See, e.g., Securities Exchange Act Release No. 57322 
(February 13, 2008), 73 FR 9370 (February 20, 2008) (File No. 10-
182) (notice of filing of application and Amendment No. 1 thereto by 
BATS Exchange, Inc. for registration as a national securities 
exchange).
    \24\ The Commission notes that NASDAQ OMX also entered into an 
agreement with the BSE, pursuant to which NASDAQ OMX would acquire 
all of the outstanding membership interests in BSE. See Securities 
Exchange Act Release Nos. 57757 (May 1, 2008), 73 FR 26159 (May 8, 
2008) (SR-BSE-2008-23) (notice of proposed rule change related to 
BSE Acquisition); and 57782 (May 6, 2008), 73 FR 27583 (May 13, 
2008) (SR-BSECC-2008-01) (notice of proposal to amend the articles 
of organization and by-laws of the BSECC to reflect its proposed 
acquisition by NASDAQ OMX). If the Commission also were to approve 
the BSE Acquisition, NASDAQ OMX would be the sole owner of five 
SROs: NASDAQ Exchange, Phlx, SCCP, BSE, and the BSECC. The 
Commission will consider the implications of those proposed 
acquisitions when it reviews that proposal.
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 A. Capital Stock

    The proposed Merger would result in NASDAQ OMX owning all of the 
issued, authorized, and outstanding common stock of the Exchange.\25\ 
Accordingly, the Exchange proposes to amend the Certificate to reduce 
the amount of common and preferred stock, and to explicitly state that 
NASDAQ OMX will hold all of the common stock of the Exchange. 
Specifically, the Exchange proposes to: (1) Reduce the amount of common 
stock that the Exchange has authority to issue from one million to 100 
shares; \26\ (2) state that all authorized shares of common stock shall 
be issued, outstanding, and held by NASDAQ OMX; \27\ (3) eliminate the 
designation of Class A and Class B common stock; \28\ (4) reduce the 
amount of preferred stock that the Exchange has authority to issue from 
100,000 to 100 shares; \29\ and (5) state that only one share of 
preferred stock, the single share of Series A Preferred Stock,\30\ is 
outstanding.\31\ In addition, the Exchange proposes to delete or amend 
several provisions applicable to the Exchange's common stock that would 
become obsolete after the Merger because NASDAQ OMX would control 100% 
of the common stock.\32\ These changes are necessary to reflect the 
change in ownership of the Exchange after the Merger, and the 
Commission finds them to be consistent with the Act.
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    \25\ See proposed Article FOURTH(c)(iv) of the Certificate and 
proposed Section 29-4(c) of the By-Laws.
    \26\ See proposed Article FOURTH of the Certificate.
    \27\ See proposed Article FOURTH(c)(iv) of the Certificate.
    \28\ See, e.g., proposed Article FOURTH of the Certificate and 
proposed Section 1-1(d) of the By-Laws. For example, Article 
FOURTH(b)(ii) sets forth the different dividend priority of holders 
of Class A common stock and Class B common stock in the event of a 
Liquidity Event (as defined in that subparagraph). This provision 
would be obsolete once only one class of common stock is authorized 
and outstanding. Correspondingly, the Exchange proposes to eliminate 
that language. Similarly, the Exchange proposes to eliminate Article 
FOURTH(c)(vi) of the Certificate, which governs the automatic 
conversion of Class A common stock, and language in Article 
FOURTH(c)(iii) of the Certificate that distinguishes between the 
voting rights of holders of Class A and Class B common stock.
    On January 20, 2007, all Class A common stock converted to Class 
B common stock shares. See Phlx Annual Report 2006 at 42. Upon 
conversion to Class B, the eligibility of holders of Class A shares 
for a contingent dividend terminated. See id. The former holders of 
the Class A shares otherwise continued to have the same rights and 
privileges, including voting, as the Class B holders. See id.
    \29\ See proposed Article FOURTH of the Certificate.
    \30\ The share of Series A Preferred Stock, which is currently 
issued and outstanding, is held by the Trust pursuant to the Trust 
Agreement. See Section 1-1(mm) of the By-Laws (defining ``Trust'') 
and Section 1-1(ee) of the By-Laws (defining ``Trust Agreement''). 
The Trustee of the Trust is required, under Section 4.1 of the Trust 
Agreement, to vote the share as directed by the vote of the Member 
Organization Representatives of Member Organizations entitled to 
vote. This voting arrangement is designed to give Members a voice in 
the management of the Exchange and is necessary because, under 
Delaware law, only stockholders can elect the directors of a 
Delaware corporation. See Securities Exchange Act Release No. 49098, 
supra note 5, 69 FR at 3979. The Merger would not result in a 
transfer of ownership of the Series A Preferred Stock.
    \31\ See proposed Article FOURTH(b)(iv) of the Certificate.
    \32\ For example, Phlx proposes to amend the dividend rights of 
common stock (see proposed Article FOURTH(c)(ii) of the Certificate) 
and eliminate provisions governing common stock incentive 
compensation. See infra note 146 and accompanying text (discussing 
the proposal to eliminate incentive compensation).
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 B. Ownership Concentration Limitations and Voting Limits

    Phlx proposes to amend the Certificate to replace the current 
ownership concentration limitations and voting limitations with new 
restrictions that would recognize that, following the Merger, NASDAQ 
OMX would own all of the common stock of the Exchange. As discussed 
below, the Exchange proposes to delete language in Article FOURTH of 
the Certificate, which limits the amount of common stock of the 
Exchange that any person may own or vote, directly or indirectly, 
without prior Commission approval. In place of this restriction, Phlx 
proposes to amend its Certificate and By-Laws to prohibit Phlx from 
transferring or assigning its common stock without prior Commission 
approval and from issuing, transferring, or assigning its preferred 
stock without prior Commission approval.\33\
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    \33\ See proposed Article FOURTH(c)(iv) of the Certificate 
(restriction on transferring or assigning common stock). This 
subparagraph also provides that all authorized shares of common 
stock of the Exchange (100 shares) be issued and outstanding and 
reflects that all of the common stock would be held by NASDAQ OMX. 
The Commission notes that any proposed issuance of common stock 
would constitute an amendment to that provision, which would be 
subject to the filing of a proposed rule change with the Commission. 
See also proposed Section 29-4(c) of the By-Laws. See proposed 
Article FOURTH(a) and (b)(v) of the Certificate and proposed Section 
29-4(d) of the By-Laws (restriction on issuing, transferring, or 
assigning preferred stock). See also infra note 43 (restrictions on 
the issuance of preferred stock).
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    The current Certificate imposes limits on direct and indirect 
changes in control of Phlx through voting and ownership limits 
applicable to holders of its common stock. These provisions enable the 
Commission, as well as the Exchange, to monitor potential changes in 
control of the Exchange, and thereby assist both the Commission and the 
Exchange in carrying out their regulatory responsibilities under the 
Act.\34\ In particular, the Certificate currently provides that, unless 
approved by the Board and by the Commission under Section 19(b) of the 
Act, no Person (either alone or together with its Related Persons) may 
own (of record or beneficially), whether directly or indirectly, more 
than 40% of the then-outstanding shares of Phlx common stock. To the 
extent that such Person (or its Related Persons) purports to own more 
than 40% of the then outstanding shares of common stock of the 
Exchange, the Person (and its Related Persons) is not entitled to 
exercise any rights and privileges incident to ownership of shares in 
excess of the 40% limit.\35\ The Certificate also provides that no 
Member (either alone or together with its Related Persons) may own, of 
record or beneficially, whether directly or indirectly, more than 20% 
of the then outstanding shares of common stock of the Exchange.\36\ 
Moreover, unless approved by the Board and by the Commission under 
Section 19(b) of the Act, no Person, either alone or together with its 
Related Persons, has any right to vote, or to give any consent or proxy 
with respect to, more than 20% of the then outstanding shares of common 
stock of the Exchange.\37\
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    \34\ See Securities Exchange Act Release No. 49098, supra note 
5, 69 FR at 3985.
    \35\ See Article FOURTH(b)(v)(A) of the Certificate.
    \36\ See Article FOURTH(b)(v)(B) of the Certificate.
    \37\ See Article FOURTH(b)(iii)(B) of the Certificate.
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    Currently, the Board would need to approve an amendment to the By-
Laws to permit any Person, together with its Related Persons, to 
exercise voting rights with respect to the shares in excess of the 20% 
voting limit or to own more than 40% of the outstanding shares of 
common stock.\38\ Such amendment would need to be filed with the 
Commission pursuant to Section 19(b) of the Act,\39\ which allows the 
Commission an opportunity to determine, among other things, whether any 
additional measures may be necessary to provide sufficient regulatory 
jurisdiction over the proposed controlling persons.\40\
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    \38\ The Board cannot approve such amendment with respect to 
Members.
    \39\ See Article FOURTH(b)(iii)(B)(1) and FOURTH(b)(v)(A)(1) of 
the Certificate.
    \40\ See Securities Exchange Act Release No. 49098, supra note 
5, 69 FR at 3985. The Commission notes that this proposed rule 
change satisfies the requirements in existing Article 
FOURTH(b)(v)(A) and (b)(iii)(B) of the Certificate and that the 
Commission's approval will allow NASDAQ OMX to exceed the existing 
ownership and voting limits in existing Article FOURTH. The proposed 
rule change will become operative upon consummation of the Merger.

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[[Page 42877]]

    As proposed, NASDAQ OMX would acquire all of the common stock of 
the Exchange. To reflect such ownership by one entity, the Exchange 
proposes to eliminate the 40% ownership and 20% voting limits. Phlx 
also proposes to eliminate the prohibition on any Member, either alone 
or together with its Related Persons, from owning (of record or 
beneficially) more than 20% of its outstanding common stock of the 
Exchange.\41\
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    \41\ See Article FOURTH(c)(v)(B) of the Certificate.
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    In place of these restrictions, Phlx proposes to adopt new 
restrictions on the transfer or assignment of common stock. 
Specifically, proposed Article FOURTH(c)(iv) of the Certificate would 
be revised to state that: (1) All 100 authorized shares of common stock 
of the Exchange shall be issued and outstanding, and shall be held by 
NASDAQ OMX; and (2) NASDAQ OMX may not transfer or assign any shares of 
Phlx common stock to any entity, unless such transaction is approved by 
the Commission.\42\ The Exchange also proposes to adopt a restriction 
on the issuance of preferred stock, as well as similar restrictions on 
the transfer or assignment of preferred stock.\43\
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    \42\ See also proposed Section 29-4(c) of the By-Laws.
    \43\ See proposed Section 29-4(d) of the By-Laws. The Exchange 
would have authority to issue 100 shares of preferred stock, of 
which one share would be designated Series A Preferred. See proposed 
Article FOURTH of the Certificate. Phlx has not issued, and does not 
currently intend to issue, any preferred stock other than the Series 
A Preferred Stock. See Notice, supra note 3, 73 FR at 23293. The 
restrictions on transfer or assignment would also apply to the 
Series A Preferred Stock. See proposed Article FOURTH(a) of the 
Certificate; see also proposed Article FOURTH(b)(v) of the 
Certificate. The proposed Merger would not impact the ownership of 
the one outstanding share of Series A Preferred Stock, which will 
continue to be held by the Trust pursuant to the Trust Agreement.
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    In addition, the NASDAQ OMX Certificate of Incorporation imposes 
limits on direct and indirect changes in control, which are designed to 
prevent any shareholder from exercising undue control over the 
operation of its SRO subsidiaries and to ensure that its SRO 
subsidiaries and the Commission are able to carry out their regulatory 
obligations under the Act. Specifically, no person who beneficially 
owns shares of common stock, preferred stock, or notes of NASDAQ OMX in 
excess of 5% of the securities generally entitled to vote may vote the 
shares in excess of 5%.\44\ This limitation would mitigate the 
potential for any NASDAQ OMX shareholder to exercise undue control over 
the operations of Phlx, and it facilitates Phlx's and the Commission's 
ability to carry out their regulatory obligations under the Act.
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    \44\ See Article Fourth.C, NASDAQ OMX Certificate.
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    The NASDAQ OMX Board may approve exemptions from the 5% voting 
limitation for any person that is not a broker-dealer, an affiliate of 
a broker-dealer, or a person subject to a statutory disqualification 
under Section 3(a)(39) of the Act,\45\ provided that the NASDAQ OMX 
Board also determines that granting such exemption would be consistent 
with the self-regulatory obligations of its SRO subsidiary.\46\ 
Further, any such exemption from the 5% voting limitation would not be 
effective until approved by the Commission pursuant to Section 19 of 
the Act.\47\ Phlx's proposed rule change reflects an amendment to the 
NASDAQ OMX By-Laws to require the NASDAQ OMX Board, prior to approving 
any exemption from the 5% voting limitation, to determine that granting 
such exemption would also be consistent with Phlx's self-regulatory 
obligations.\48\
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    \45\ 15 U.S.C. 78c(a)(39). See Article Fourth.C.6, NASDAQ OMX 
Certificate.
    \46\ Specifically, the NASDAQ OMX Board must determine that 
granting such exemption would (1) not reasonably be expected to 
diminish the quality of, or public confidence in, NASDAQ OMX or the 
other operations of NASDAQ OMX, on the ability to prevent fraudulent 
and manipulative acts and practices and on investors and the public, 
and (2) promote just and equitable principles of trade, foster 
cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to an 
facilitating transactions in securities or assist in the removal of 
impediments to or perfection of the mechanisms for a free and open 
market and a national market system. See Article Fourth.C.6, NASDAQ 
OMX Certificate.
    \47\ See Section 12.5, NASDAQ OMX By-Laws.
    \48\ See proposed Section 12.5, NASDAQ OMX By-Laws.
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    The Commission approved the existing limits in Phlx's Certificate 
to enable the Exchange to carry out its self-regulatory 
responsibilities, and to enable the Commission to fulfill its 
responsibilities under the Act.\49\ After the Merger, these goals would 
be achieved by the proposed new restrictions on the transfer or 
assignment of Phlx capital stock and on the issuance of preferred 
stock, together with the ownership and voting restrictions on NASDAQ 
OMX shareholders. In particular, the simplified provisions of Phlx's 
Certificate and By-Laws are tailored to an exchange whose common stock 
is wholly-owned by one company. By explicitly stating that NASDAQ OMX 
would be the owner of 100% of the Exchange's issued and outstanding 
common stock, and that no preferred stock has been issued other than 
the Series A Preferred Stock held by the Trust, any purported issuance, 
transfer, or assignment of any capital stock would constitute an 
amendment to the Certificate and By-Laws and therefore be subject to a 
filing with the Commission under Section 19 of the Act. Moreover, the 
NASDAQ OMX Certificate currently includes restrictions on any person 
voting shares in excess of 5%. The changes to the NASDAQ OMX By-Laws 
would require the NASDAQ OMX Board, prior to approving an exemption 
from the 5% voting limitation, to determine that granting such 
exemption would be consistent with Phlx's self-regulatory obligations.
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    \49\ See supra note 34 and accompanying text.
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    Accordingly, the Commission finds that the elimination of the 
current ownership and voting limits and the adoption of new controls on 
the issuance, transfer, and assignment of Phlx capital stock, together 
with the ownership and voting limitations in NASDAQ OMX's Certificate 
and By-Laws, are designed to prevent any shareholder from exercising 
undue control over the operation of Phlx and to ensure that Phlx and 
the Commission are able to carry out their regulatory obligations under 
the Act and thereby should minimize the potential that a person could 
improperly interfere with or restrict the ability of the Commission or 
Phlx to effectively carry out their respective regulatory oversight 
responsibilities under the Act.

C. Management of the Exchange

1. Relationship between NASDAQ OMX and Phlx
    After the merger, Phlx would become a subsidiary of NASDAQ OMX. 
Although NASDAQ OMX is not an SRO and, therefore, will not itself carry 
out regulatory functions, its activities with respect to the operation 
of Phlx must be consistent with, and not interfere with, Phlx's self-
regulatory obligations. Proposed changes to NASDAQ OMX's By-Laws would 
make applicable to all of NASDAQ OMX's SRO subsidiaries, including Phlx 
(after the Merger), certain provisions of NASDAQ OMX's Restated 
Certificate of Incorporation and NASDAQ OMX's By-Laws that are designed 
to maintain the independence of each of its SRO subsidiaries' self-
regulatory function, enable each SRO subsidiary to operate in a manner 
that complies with the federal securities laws, and facilitate the 
ability of each

[[Page 42878]]

SRO subsidiary and the Commission to fulfill their regulatory and 
oversight obligations under the Act.\50\
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    \50\ See Amendment No. 2, supra note 4 (including the amended 
By-Laws of NASDAQ OMX to the Phlx's proposal).
---------------------------------------------------------------------------

    Although NASDAQ OMX will not itself carry out regulatory functions, 
its activities with respect to the operation of its SRO subsidiaries, 
including Phlx and SCCP, must be consistent with, and not interfere 
with, those subsidiaries' self-regulatory obligations. The By-Laws of 
NASDAQ OMX include certain provisions to address this concern. In 
particular, the By-Laws of NASDAQ OMX specify that NASDAQ OMX and its 
officers, directors, employees, and agents irrevocably submit to the 
jurisdiction of the United States federal courts, the Commission, and 
each self-regulatory subsidiary of NASDAQ OMX for the purposes of any 
suit, action or proceeding pursuant to the United States federal 
securities laws, and the rules and regulations thereunder, arising out 
of, or relating to, the activities of any self-regulatory 
subsidiary.\51\ Further, NASDAQ OMX agreed to provide the Commission 
with access to its books and records.\52\ NASDAQ OMX also agreed to 
keep confidential non-public information relating to the self-
regulatory function \53\ of the Exchange and not to use such 
information for any non-regulatory purpose. In addition, the NASDAQ OMX 
Board, as well as its officers, employees, and agents are required to 
give due regard to the preservation of the independence of Phlx's self-
regulatory function.\54\ Similarly, the NASDAQ OMX Board, when 
evaluating any issue, would be required to take into account the 
potential impact on the integrity, continuity, and stability of the its 
SRO subsidiaries.\55\ Finally, the NASDAQ OMX By-Laws require that any 
changes to the NASDAQ OMX Certificate and By-Laws be submitted to the 
Board of Directors of each of its SRO subsidiaries, including the 
Exchange, and, if such amendment is required to be filed with the 
Commission pursuant to Section 19(b) of the Act, such change shall not 
be effective until filed with, or filed with and approved by, the 
Commission.
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    \51\ See proposed Section 12.3, NASDAQ OMX By-Laws.
    \52\ See proposed Section 12.1(c), NASDAQ OMX By-Laws. To the 
extent that they relate to the activities of Phlx, all books, 
records, premises, officers, directors, and employees of NASDAQ OMX 
would be deemed to be those of the Phlx. See id.
    \53\ This requirement to keep confidential non-public 
information relating to the self-regulatory function shall not limit 
the Commission's ability to access and examine such information or 
limit the ability of directors, officers, or employees of the Nasdaq 
Holding Company from disclosing such information to the Commission. 
See proposed Section 12.1(b), NASDAQ OMX By-Laws. Holding companies 
with SRO subsidiaries have undertaken similar commitments. See, 
e.g., Securities Exchange Act Release No. 56955 (December 13, 2007), 
72 FR 71979, 71983 (December 19, 2007) (SR-ISE-2007-101) (order 
approving the acquisition of International Securities Exchange, 
LLC's parent, International Securities Exchange Holdings, Inc., by 
Eurex Frankfurt AG).
    \54\ See Section 12.1(a), NASDAQ OMX By-Laws.
    \55\ See proposed Section 12.7, NASDAQ OMX By-Laws.
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    The Commission believes that the NASDAQ OMX By-Laws, as amended to 
accommodate the Merger, are designed to facilitate the Phlx's ability 
to fulfill its self-regulatory obligations and are, therefore, 
consistent with the Act. In particular, the Commission believes these 
changes are consistent with Section 6(b)(1) of the Act,\56\ which 
requires, among other things, that a national securities exchange be so 
organized and have the capacity to carry out the purposes of the Act, 
and to comply and 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.
---------------------------------------------------------------------------

    \56\ 15 U.S.C. 78f(b)(1).
---------------------------------------------------------------------------

    The Commission also believes that under Section 20(a) of the Act 
\57\ any person with a controlling interest in NASDAQ OMX would be 
jointly and severally liable with and to the same extent that NASDAQ 
OMX 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. In 
addition, Section 20(e) of the Act \58\ creates aiding and abetting 
liability for any person who knowingly provides substantial assistance 
to another person in violation of any provision of the Act or rule 
thereunder. Further, Section 21C of the Act \59\ authorizes the 
Commission to enter a cease-and-desist order against any person who has 
been ``a cause of'' a violation of any provision of the Act through an 
act or omission that the person knew or should have known would 
contribute to the violation.
---------------------------------------------------------------------------

    \57\ 15 U.S.C. 78t(a).
    \58\ 15 U.S.C. 78t(e).
    \59\ 15 U.S.C. 78u-3.
---------------------------------------------------------------------------

2. Composition and Term of Board
    The Exchange proposes to give its Board discretion to determine its 
size from time to time,\60\ and after the Merger the Board would likely 
be reduced in size from its current slate of 23 Governors. 
Specifically, the Board would include one Governor who is the CEO, one 
Governor who is the Vice-Chair of the Board,\61\ one PBOT Governor,\62\ 
one Member Governor,\63\ one Stockholder Governor,\64\ and a number of 
Independent Governors determined by the Board,\65\ including the 
Designated Independent Governors. ``Designated Independent Governors'' 
would continue to be defined as those Independent Governors who are 
voted for by Members, and who are then elected to the Board by the 
Holder of the Series A Preferred Stock according to the vote of the 
Members.\66\
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    \60\ See proposed Article SIXTH(a) of the Certificate and 
proposed Section 4-1 of the By-Laws.
    \61\ The Vice-Chair would continue to be an individual who, 
anytime within the prior three years, has been a Member primarily 
engaged in business on the Exchange's equity market or equity 
options market or who is a general partner, executive officer (vice-
president or above) or a Member associated with a Member 
Organization primarily engaged in business on the Exchange's equity 
market or equity options market. See Section 5-3 of the By-Laws. The 
term ``Member Organization'' is defined in Section 1-1(v) of the By-
Laws.
    \62\ A PBOT Governor would continue to be defined as a Governor 
who is a member of PBOT and is duly elected to fill the one vacancy 
on the Board allocated to the PBOT Governor. See Section 1-1(aa) of 
the By-Laws.
    \63\ A Member Governor would continue to be defined as a 
Governor who is a Member or a general partner or an executive 
officer (vice-president and above) of a Member Organization and is 
duly elected to fill the vacancy on the Board allocated to the 
Member Governor. See Section 1-1(u) of the By-Laws. Phlx proposes to 
amend its Certificate and By-Laws to reflect its proposal that the 
new Board consist of only one Member Governor. See proposed Article 
SIXTH(a)(ii) of the Certificate and proposed Sections 1-1(e), 1-1(u) 
and 4-1 of the By-Laws.
    \64\ See proposed Section 4-1 of the By-Laws and proposed 
Article SIXTH(a)(iii) of the Certificate. A Stockholder Governor 
would be defined as a Governor who is an officer, director (or a 
person in a similar position in business entities that are not 
corporations), designee or an employee of a holder of common stock 
or any affiliate or subsidiary of such holder of common stock and is 
duly elected to fill the vacancy on the Board allocated to the 
Stockholder Governor. See proposed Section 1-1(hh) of the By-Laws; 
see also proposed Article SIXTH(a)(ix) of the Certificate.
    \65\ As discussed below, Independent Governors would continue to 
constitute a majority of the Board, and Designated Independent 
Governors, would, together with the Member Governor and the PBOT 
Governor, equal at least 20% of the total number of Governors. See 
Section 4-1 of the By-Laws.
    \66\ See Section 1-1(f) of the By-Laws and Article 
FOURTH(a)(iii) of the Certificate, which Phlx proposes to renumber 
(see proposed Article FOURTH(b)(iii)).
---------------------------------------------------------------------------

    Though it may be reduced in size, the Board would be composed, as 
it currently is, of a majority of Independent Governors, who, by 
definition, would have no Material Relationship with the Exchange, any 
affiliate of the Exchange, any Member of the Exchange, any Member 
affiliate, or any issuer of securities that are listed or

[[Page 42879]]

traded on the Exchange or a facility of the Exchange.\67\ Notably, the 
new Board would select its Chair from among its members that are 
Independent Governors, instead of the current arrangement where the CEO 
also serves as the Chairman of the Board.\68\
---------------------------------------------------------------------------

    \67\ See proposed Section 4-1 of the By-Laws (the Board shall be 
composed of a majority of Independent Governors); proposed Article 
SIXTH(a)(vii) of the Certificate (defining ``Independent 
Governor''). The terms ``Independent,'' ``Material Relationship,'' 
and ``Member'' are defined in Sections 1-1(o), 1-1(s), and 1-1(t) of 
the By-Laws, respectively.
    \68\ See proposed Section 5-2 of the By-Laws. Currently, the 
Chairman of the Board is the CEO. See Article SIXTH(a)(v) of the 
Certificate and Sections 4-1 and 5-1 of the By-Laws (all providing 
that the Chairman of the Board shall be the individual then holding 
the office of CEO).
---------------------------------------------------------------------------

    The Commission finds that the proposed changes regarding the 
composition of the Board are consistent with the Act, including Section 
6(b)(1) of the Act,\69\ which requires, among other things, that a 
national securities exchange be organized to carry out the purposes of 
the Act and comply with the requirements of the Act.
---------------------------------------------------------------------------

    \69\ 15 U.S.C. 78f(b)(1).
---------------------------------------------------------------------------

    Phlx proposes to set forth in detail the powers and duties of the 
Chair and Vice-Chair.\70\ This provision is intended to be generally 
consistent with current NASDAQ Exchange By-Law Article VII, and the 
Commission finds it consistent with the Act.
---------------------------------------------------------------------------

    \70\ See Article V of the By-Laws.
---------------------------------------------------------------------------

    The Exchange also proposes to change the term of office for all 
Governors from three years to one year \71\ and eliminate term limits 
for Governors.\72\ The Commission finds this consistent with the Act 
and notes that establishing one-year terms for directors is consistent 
with other proposals previously approved by the Commission.\73\ 
Further, the Commission notes that neither Phlx's proposed parent 
company, NASDAQ OMX, nor NASDAQ Exchange have term limits for their 
respective boards.\74\
---------------------------------------------------------------------------

    \71\ See proposed Section 4-3(a) of the By-Laws. That section 
currently provides that the Stockholder Governors, Independent 
Governors (including the Designated Independent Governors), Member 
Governors, and the PBOT Governor serve for three-year terms, which 
are staggered.
    \72\ See proposed Section 4-3(a) of the By-Laws. That section 
currently prohibits Governors, except for the Chairman of the Board 
and the Vice-Chairman of the Board, from serving for more than two 
consecutive full terms.
    \73\ See, e.g., Securities Exchange Act Release No. 55293 
(February 14, 2007), 72 FR 8033 (February 22, 2007) (SR-NYSE-2006-
120) (approving one-year terms for NYSE Euronext directors). 
Additionally, the Restated Certificate of Incorporation of the 
NASDAQ Stock Market, Inc. also provides for one-year terms for 
directors other than Preferred Stock Directors.
    \74\ See Article IV of the NASDAQ OMX By-Laws and Article III of 
the NASDAQ Exchange By-Laws.
---------------------------------------------------------------------------

    In addition, Phlx proposes that, in the event of a vacancy in the 
office of Vice-Chair, the Nominating, Elections and Governance 
Committee would select a replacement to serve the remainder of the 
unexpired term, subject to approval by the Board.\75\ This provision is 
intended to be generally consistent with current NASDAQ Exchange By-Law 
Article IV. Section 4-19 of the By-Laws designates, with specificity, 
when a Governor's term begins, and provides that a Governor's term ends 
only when his or her successor is elected and qualifies, or when the 
Governor resigns or is removed. The Exchange proposes to modify this 
provision to eliminate the reference to a Governor's term beginning at 
a particular time and provides that a Governor's term will end when a 
successor is elected or upon their earlier resignation, removal, or 
death. The Commission finds these changes consistent with the Act and 
believes that they should provide additional clarity and, therefore, 
would facilitate orderly successions of Governors.\76\
---------------------------------------------------------------------------

    \75\ See proposed Section 5-3 of the By-Laws.
    \76\ This proposed change is identical to a proposal by another 
national securities exchange recently approved by the Commission. 
See Securities Exchange Act Release No. 56955 (December 13, 2007), 
72 FR 71979 (SR-ISE-2007-101) (approving proposed Section 3.2 of the 
by-laws of the International Securities Exchange, LLC).
---------------------------------------------------------------------------

3. Nomination, Election, and Removal of Non-Designated Governors
    The Exchange proposes changes to the nomination and election 
process for non-Designated Governors (i.e., Independent Governors, the 
Vice-Chair, the CEO, and the Shareholder Governor). These changes are 
primarily designed to simplify the process to accommodate a single 
Stockholder. Currently, the non-Designated Governors are nominated 
through different mechanisms, including: (1) The Nominating, Elections 
and Governance Committee nominates the individual then holding the 
office of CEO as Chairman of the Board for election by the 
Stockholders; (2) the Chairman recommends a Vice-Chairman candidate to 
the Nominating, Elections and Governance Committee for election by 
Stockholders; and (3) the Nominating, Elections and Governance 
Committee review the qualifications of nominees, including independent 
nominees, for the Stockholder Governors and Independent Governors 
(excluding the Designated Independent Governors).\77\ Phlx now proposes 
that the holder of its common stock present for nomination to the 
Nominating, Elections and Governance Committee the candidates for Vice-
Chair, Stockholder Governor, and Independent Governors.\78\ These 
candidates would be placed on the ballot and elected by the holder of 
common stock at the annual meeting of Shareholders. Thus, NASDAQ OMX, 
as sole holder of common stock of the Exchange, would nominate and 
elect all of the non-Designated Governors. This approach is consistent 
with the NASDAQ Exchange's processes for nomination of non-Member 
Representative Directors by a nominating committee that may seek the 
input and recommendations of NASDAQ OMX as the owner of the NASDAQ 
Exchange.\79\
---------------------------------------------------------------------------

    \77\ See Section 28-3 of the By-Laws.
    \78\ See proposed Section 28-3 of the By-Laws. As proposed, 
Section 28-3 has no provision for the nomination or election of the 
Chair of the Board because the Board would appoint its Chair from 
among the members of the Board who are Independent Governors. See 
proposed Section 5-2 of the By-Laws.
    \79\ See NASDAQ Exchange By-Law Article III, Section 6.
---------------------------------------------------------------------------

    The Exchange also proposes to change the process for removing non-
Designated Governors. Currently, non-Designated Governors may be 
removed only for cause, except that upon a recommendation by the Board 
to Stockholders such Governors may be removed without cause. An 
affirmative vote of two-thirds of the total number of Stockholders 
entitled to vote thereon is required to remove a non-Designated 
Governor. The proposed change would more explicitly permit the removal 
of non-Designated Governors with or without cause, and to allow removal 
of such Governors by the affirmative vote of a majority of the voting 
power entitled to vote for their election (i.e., NASDAQ OMX).\80\ This 
change would reflect the Exchange's proposed status as a wholly-owned 
subsidiary of NASDAQ OMX. The Board would continue to have the ability 
to recommend to the Stockholder that a Governor be removed for any 
reason deemed sufficient by the Board,\81\ but such recommendation 
would no longer be a prerequisite for removal.
---------------------------------------------------------------------------

    \80\ See proposed Article SIXTH (b)(i) of the Certificate. The 
Exchange also proposes to allow any action required or permitted to 
be taken at any annual or special meeting of Stockholders to be 
taken by Stockholders (i.e., NASDAQ OMX) without a meeting, unless 
otherwise specified in the Certificate. See proposed Article SEVENTH 
of the Certificate and proposed Section 28-13 of the By-Laws. In 
light NASDAQ OMX's ownership of all of the common stock of the 
Exchange, the Commission finds this change to be consistent with the 
Act.
    \81\ See proposed Section 4-4 of the By-Laws.
---------------------------------------------------------------------------

    The Commission finds that the proposed changes to the nomination, 
election, and removal processes for non-Designated Governors are 
consistent with Section 6(b)(1) of the Act, which

[[Page 42880]]

requires an exchange to be organized in a manner that allows it to 
carry out the purposes of the Act. The proposed changes appropriately 
streamline the nomination, election, and removal processes for non-
Designated Governors in light of NASDAQ OMX's ownership of all of the 
common stock of the Exchange.
Fair Representation
    Section 6(b)(3) of the Act requires that the rules of an exchange 
assure fair representation of its members in the selection of its 
directors and administration of its affairs.\82\ As discussed above, 
the Exchange proposes to give its Board discretion to determine its 
size.\83\ Members would, nevertheless, continue to select at least 20% 
of the Board after the Merger, including the Member Governor, the PBOT 
Governor,\84\ and the Designated Independent Governors (collectively, 
the ``Designated Governors'').\85\ These Designated Governors would 
continue to be elected by the Holder of Series A Preferred Stock (i.e., 
the Trust \86\), and therefore they would continue to be elected 
indirectly by the Members. Phlx proposes to change Section 3-7(a) of 
the By-Laws, which prohibits a Member Organization from endorsing more 
than one nominee for Governor, to clarify that Member Organizations are 
prohibited from endorsing more than one nominee per vacancy. This 
proposed change is designed to clarify the rights of Members in the 
independent nomination process by eliminating any ambiguity that each 
Member Organization may endorse one independent nominee per Designated 
Governor vacancy, not one independent nominee per election.
---------------------------------------------------------------------------

    \82\ 15 U.S.C. 78f(b)(3).
    \83\ See supra note 60 and accompanying text.
    \84\ A PBOT Governor would continue to be defined as a Governor 
who is a member of PBOT and is duly elected to fill the one vacancy 
on the Board allocated to the PBOT Governor. See Section 1-1(aa) of 
the By-Laws; see also proposed Article SIXTH(a)(i) of the 
Certificate.
    \85\ The nominations process for Designated Governors (i.e., the 
Designated Independent Governors, the Member Governor, and the PBOT 
Governor) is described in Section 3-7 of the By-Laws.
    \86\ See supra note 30 (discussing the purpose and operation of 
the Trust).
---------------------------------------------------------------------------

    Designated Governors currently may be removed only for cause, 
unless the Board recommends that they be removed without cause. In 
either case, removal of a Designated Governor requires a vote by Member 
Organization Representatives at an annual or special meeting.\87\ Phlx 
proposes to simplify the process to provide that Designated Governors 
may be removed, with or without cause, only by vote of Member 
Organization Representatives at an annual or special meeting.\88\ The 
Board would continue to have the ability to recommend to the Members 
that a Designated Governor be removed for any reason deemed sufficient 
by the Board,\89\ but such recommendation would no longer be a 
prerequisite for removal. Importantly, the Commission notes that the 
Designated Governors, which are selected by a vote of the Members, may 
only be removed upon the affirmative vote of Members. While the Board 
may recommend to the Members that a Designated Governor be removed, the 
Board may not unilaterally remove a Designated Governor.
---------------------------------------------------------------------------

    \87\ See Article SIXTH(b)(iii) of the Certificate.
    \88\ See proposed Section 3-3 of the By-Laws. A special meeting 
of the Members could be called either by Members, the Board, or the 
Chair of the Board. See Section 3-2(b) of the By-Laws. Such 
Governors could be removed by the holder of the Series A Preferred 
Stock following a vote of the Member Organization Representatives. 
See proposed Article SIXTH (b)(ii) of the Certificate.
    \89\ See proposed Section 4-4 of the By-Laws.
---------------------------------------------------------------------------

    In addition, Members will be represented on key Standing 
Committees. Specifically, under the By-Laws, at least half of the 
Admissions Committee and the Foreign Currency Options Committee will 
continue to be required to be permit holders or participants or be 
associated with a Member Organization or participant organization,\90\ 
and at least half of the Options Committee will continue to be required 
to be permit holders or be associated with a Member Organization.\91\ 
Further, the By-Laws will continue to require 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.\92\
---------------------------------------------------------------------------

    \90\ See Sections 10-6(a) and 10-17 of the By-Laws.
    \91\ See Section 10-20 of the By-Laws.
    \92\ See Section 10-6(b) of the By-Laws.
---------------------------------------------------------------------------

    Several Standing Committees also may review proposed rule changes 
before such proposals are presented to the Executive Committee or the 
Board for approval for filing with the Commission. These committees on 
which Members serve would continue to perform this function after the 
Merger. For example, the Business Conduct Committee may review proposed 
changes to the disciplinary provisions that are set forth in Rule 960 
before such proposals are presented to the Executive Committee or the 
Board.\93\ Further, the Options Committee makes or recommends for 
adoption such rules as it deems necessary for the convenient and 
orderly transaction of business upon the equity and index options 
trading floor, as well as makes and enforces rules and regulations 
relating to order, decorum, health, safety and welfare on the equity 
and index options trading floor and the immediately adjacent premises 
of the Exchange.\94\ Additionally, the Exchange proposes to ensure 
Member representation on the Quality of Markets Committee.\95\ Finally, 
Designated Governors, which are selected by Members, would compose at 
least 20% of the Executive Committee.\96\
---------------------------------------------------------------------------

    \93\ The Business Conduct Committee is composed of nine members 
as follows: 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. See Section 10-11 of the By-Laws.
    \94\ See Section 10-20 of the By-Laws.
    \95\ See infra notes 133-134 and accompanying text (discussing 
Member representation on the Quality of Markets Committee).
    \96\ See infra text accompanying note 110 (discussing the 
composition of the Executive Committee).
---------------------------------------------------------------------------

    The Commission finds that the selection of at least 20% of 
Governors of the Board,\97\ the manner in which such Designated 
Governors will be nominated and elected,\98\ the process for removing 
Designated Governors,\99\ together with the representation of Members 
on key Standing Committees, satisfy the fair representation 
requirements of Section 6(b)(3) of the Act,\100\ which requires that an 
exchange assure a fair representation of its members in the selection 
of its directors and administration of its affairs. The Commission also 
notes that these provisions are consistent with previous proposals 
approved by the Commission.\101\
---------------------------------------------------------------------------

    \97\ See proposed Article SIXTH(a)(iv) of the Certificate and 
proposed Section 4-1 of the By-Laws.
    \98\ See supra Section III.C.2 and infra Section III.C.4, 
respectively.
    \99\ See supra Section III.C.3.
    \100\ 15 U.S.C. 78f(b)(3).
    \101\ See, e.g., Securities Exchange Act Release Nos. 53128 
(January 13, 2006), 71 FR 3550 (January 23, 2006) (approving the 
application of the NASDAQ Exchange for registration as a national 
securities exchange) and 49098, supra note 5.
---------------------------------------------------------------------------

4. Special Committee of the Board
    Phlx proposes to delete references to a ``special committee of the 
Board of Governors'' that hears appeals from determinations of the 
Nominating, Elections and Governance Committee on appeals concerning 
eligibility for election to the Board.\102\ The special committee had 
been composed of Governors who were not then standing for re-election. 
However, because the

[[Page 42881]]

Exchange proposes to eliminate the staggering of the Board and require 
all Governors to be elected annually, it would not be possible to form 
such a special committee. Instead, the Exchange proposes that the full 
Board preside over such appeals.\103\
---------------------------------------------------------------------------

    \102\ See proposed Section 11-1(b) of the By-Laws.
    \103\ See id.
---------------------------------------------------------------------------

    The Commission finds that this proposal is consistent with Sections 
6(b)(1) and 6(b)(3) of the Act.\104\ In particular, the Commission 
notes that Designated Governors selected by the Members will constitute 
at least 20% of the Board, and therefore Members will be represented 
when the Board acts as an adjudicative body to hear appeals concerning 
eligibility for election to the Board.
---------------------------------------------------------------------------

    \104\ 15 U.S.C. 78f(b)(1) and 15 U.S.C. 78f(b)(3).
---------------------------------------------------------------------------

5. Standing Committees of the Board
    The Exchange proposes several changes to its Standing Committees, 
which reflect incremental modifications to the structure and scope of 
its current committees. As discussed below, the Commission finds these 
changes to be consistent with the Act, including Section 6(b)(1) of the 
Act,\105\ which requires that a national securities exchange be 
organized in such a manner as to allow the exchange to carry out the 
purposes of the Act, comply with the requirements of the Act, and 
enforce compliance with the Act by its members and persons associated 
with its members.
---------------------------------------------------------------------------

    \105\ 15 U.S.C. 78f(b)(1).
---------------------------------------------------------------------------

    Automation Committee and the Marketing Committee. The Exchange 
proposes to eliminate two Standing Committees: the Automation Committee 
\106\ and the Marketing Committee.\107\ According to the Exchange, 
these committees are no longer necessary because, after the NASDAQ OMX 
Merger, these functions would be guided and handled at the parent 
company level.\108\ The Commission believes that the elimination of 
these Exchange committees, combined with Phlx's reliance on NASDAQ OMX 
to perform the functions of those committees, is consistent with 
Section 6(b)(1) of the Act, 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. The 
Commission notes that, as the Exchange contemplates future changes to 
its automated trading systems, the Exchange would be required to file 
any changes to its rules with the Commission pursuant to Section 19(b) 
of the Act and Rule 19b-4 thereunder.\109\
---------------------------------------------------------------------------

    \106\ See Section 10-10 of the By-Laws. The Automation Committee 
currently is charged with periodically reviewing and approving 
automation plans affecting the trading floors, subsidiaries and the 
Exchange's administrative areas.
    \107\ See Section 10-18 of the By-Laws. The Marketing Committee 
currently acts in an advisory capacity to the officers of the 
Exchange in marketing the services of the Exchange.
    \108\ See Notice, supra note 3, 73 FR at 23295.
    \109\ 15 U.S.C. 78s(b) and 17 CFR 240.19b-4, respectively.
---------------------------------------------------------------------------

    Executive Committee. In addition, the Exchange proposes to change 
the composition of the Executive Committee and limit its authority. 
Currently, Section 10-14(a) provides that the Executive Committee be 
composed of the following nine members: the Chairman of the Board, who 
serves as Chair of the Committee; the Vice-Chairman of the Board; the 
Chairman of the Finance Committee; the Chairmen of two floor 
committees; two Stockholder Governors; and two Independent Governors. 
Phlx proposes to amend this provision to allow the Board to determine 
the size of the committee, except that the Committee must include: the 
Chair of the Board, who would be the Chair of the Committee; the Vice-
Chair of the Board; the Stockholder Governor; and a number of 
Designated Governors equal to at least 20% of the total number of 
Governors on the committee.\110\
---------------------------------------------------------------------------

    \110\ See supra text accompanying note 96 (discussing the 
representation of Designated Governors on the Executive Committee).
---------------------------------------------------------------------------

    The Executive Committee currently appoints, subject to approval by 
the Board, all members (except the Chairmen) of the Standing 
Committees, excluding the Nominating, Elections and Governance 
Committee and the Executive Committee.\111\ The Exchange now proposes 
to instead provide that the Board, instead of the Executive Committee, 
select all members of Standing Committees,\112\ including most Standing 
Committee Chairs.\113\ This change would conform the Exchange's 
practice to how NASDAQ OMX currently operates.\114\ The Commission 
finds that these changes are consistent with Sections 6(b)(1) and 
6(b)(3) of the Act.\115\
---------------------------------------------------------------------------

    \111\ See Sections 10-1(b), 10-4, and 10-14(c) of the By-Laws. 
Chairmen of the Standing Committees are selected, subject to Board 
approval, by the Nominating, Elections and Governance Committee. See 
Section 10-19(d) of the By-Laws.
    \112\ See proposed Sections 10-1(b) and 10-4 of the By-Laws. 
Correspondingly, the Exchange proposes to delete Sections 10-14(c) 
and 10-19(d) of the By-Laws which provide, respectively, that the 
Executive Committee shall appoint members of the Standing Committees 
(excluding their Chairmen), subject to Board approval, and that the 
Nominating, Elections and Governance Committee shall select all 
Standing Committee Chairmen, subject to approval by the Board.
    \113\ As amended, the By-Laws would specifically provide that: 
(1) The Chair of the Board is the Chair of the Executive Committee; 
(2) the Chair of the Board is the Chair of the Finance Committee; 
and (3) the Nominating, Elections and Governance Committee select 
its own Chair from among the members of such Committee who are 
Independent Governors. See proposed Sections 10-14(a), 10-15 and 10-
19(a) of the By-Laws, respectively.
    \114\ See NASDAQ OMX By-Law Article IV, Section 4.13.
    \115\ 15 U.S.C. 78f(b)(1) and 15 U.S.C. 78f(b)(3).
---------------------------------------------------------------------------

    Audit Committee. Phlx proposes to modify the responsibilities of 
the Audit Committee to conform to similar responsibilities and 
processes of the Audit Committees of NASDAQ OMX and the NASDAQ 
Exchange.\116\ Specifically, Phlx proposes to replace the enumerated 
duties of the committee with respect to external auditors with a more 
general charge to select, evaluate and, where appropriate, replace the 
Exchange's independent auditors (or nominate the independent auditors 
to be proposed for ratification by the Stockholders).\117\ Phlx would 
also confer to the committee more specific responsibilities with 
respect to the Exchange's Internal Audit Department (``IAD''), 
including authority to hire or terminate the head of the IAD and 
determine the IAD's budget. Further, Phlx proposes to eliminate the 
requirement that the committee review all legal matters that may 
materially impact the Exchange's financial statements and all 
regulatory examination, inspection, and other reports. The Commission 
finds these changes consistent with Section 6(b)(1) of the Act, and 
notes that such changes are based on the Audit Committees of NASDAQ OMX 
and the NASDAQ Exchange.
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    \116\ See NASDAQ OMX Audit Committee Charter approved April 18, 
2007 and NASDAQ Exchange By-Law Article III.
    \117\ Compare Section 10-9(b) of the By-Laws with proposed 
Section 10-9 of the By-Laws.
---------------------------------------------------------------------------

    Finance Committee. The Exchange proposes to change the composition 
of the Finance Committee and update the description of the committee's 
responsibilities.\118\ Currently, the committee is composed of the 
following nine members: the Chairman of the Board; the Vice-Chairman of 
the Board; one Stockholder Governor; four Independent Governors, and 
two Members or persons associated with a Member Organization, one of 
whom conducts business primarily on XLE or on the equity options floor. 
Phlx

[[Page 42882]]

proposes that following the Merger, the Finance Committee would be 
composed of: the Chair of the Board; the Vice-Chair of the Board; a 
number of Designated Independent Governors equal to at least 20% of the 
total number of voting members on the Finance Committee; two Members or 
persons associated with a Member Organization who may be Governors one 
of whom conducts business on XLE or on the equity options floor; \119\ 
and such other Governors as the Board may appoint.\120\ Phlx states 
that the elimination of the requirement that one of the committee 
members ``primarily'' conduct business on XLE or the equities option 
floor would allow a greater pool of candidates to be eligible to serve 
on the Finance Committee and is consistent with a recent change to 
Section 10-11 of the By-Laws.\121\
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    \118\ See proposed Section 10-15 of the By-Laws. The Exchange 
proposed to delete the Supplementary Material in Section 10-15, 
which sets forth a series of directives issued by the Board that 
were specifically applicable to the Finance Committee. These 
proposed changes are not directly related to the Merger.
    \119\ Under the proposal, these committee members need not be 
Governors, but any non-Governor would serve in a non-voting 
capacity. See proposed Section 10-15 of the By-Laws.
    \120\ See proposed Section 10-15 of the By-Laws.
    \121\ See Notice, supra note 3, 73 FR at 23296. The Commission 
notes that this change is similar to a recently-approved change to a 
different By-Law. See Securities Exchange Act Release No. 57023 
(December 20, 2007), 72 FR 74398 (December 31, 2007) (SR-Phlx-2007-
83) (approving a proposal to similarly expand the type of business 
that may be conducted to qualify as a Business Conduct Committee 
member).
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    The Exchange also would eliminate the current restriction that 
prohibits the Chair of the Board from creating tie votes of the Finance 
Committee, and would designate the Chair of the Board as the Finance 
Committee Chair.\122\ Finally, the Exchange proposes to delete the 
Supplementary Material that sets forth a series of directives issued by 
the Board that are specifically applicable to the Finance 
Committee.\123\ Elimination of the Supplementary Material is designed 
to allow the Board flexibility in establishing capital expenditure 
policies, which may include delegation to Board committees and/or 
officers. The Exchange states that this more flexible approach is 
consistent with NASDAQ OMX's processes.\124\ The Commission finds that 
this proposal is consistent with Section 6(b)(1) of the Act, and notes 
that Phlx's obligation to adequately fund its regulatory oversight 
program \125\ is unaffected by the proposed elimination of the 
Supplementary Material to Section 10-15 of the By-Laws.
---------------------------------------------------------------------------

    \122\ Under the current provision, the Chair of the Committee 
must be either the Vice-Chair, Stockholder Governor, or Member 
Governor.
    \123\ Currently, the supplementary material relates to 
directives that are applicable to the Finance Committee in the 
exercise of its duties, powers and authority under the By-Laws. For 
example, the supplementary material states that the Finance 
Committee may authorize certain expenditures of any budgeted line 
items; may delegate to the staff of the Exchange so much of its 
authority to make expenditures as it deems appropriate; and shall 
perform its functions and act with the same powers and limitations 
for the Exchange and all subsidiaries of the Exchange. See 
Supplementary Material to Section 10-15 of the By-Laws.
    \124\ See Notice, supra note 3, 73 FR at 23296.
    \125\ 15 U.S.C. 78s(g).
---------------------------------------------------------------------------

    Nominating, Elections and Governance Committee. The Exchange also 
proposes certain changes to the composition of the Nominating, 
Elections and Governance Committee. Currently, the committee is 
composed of three Independent Governors, at least one of which is a 
Designated Independent Governor, one Stockholder Governor, and one 
Member Governor. As proposed, the committee would be composed of four 
Independent Governors and one Member Governor.\126\ The Exchange also 
proposes to delete the term limit applicable to this committee and 
delete the prohibition against members of this committee standing for 
re-election to the Board. These proposals are designed, according to 
the Exchange, to increase the pool of candidates eligible to serve on 
the Committee and the Board.\127\ The Commission finds that these 
changes are consistent with Section 6(b)(1) of the Act. The Commission 
notes that it recently approved a similar Phlx proposal to increase the 
pool of candidates eligible to serve on one of Phlx's Standing 
Committees.\128\
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    \126\ See proposed Section 10-19(a) of the By-Laws.
    \127\ See Notice, supra note 3, 73 FR at 23296.
    \128\ See Securities Exchange Act Release No. 57023, supra note 
121.
---------------------------------------------------------------------------

    Quality of Markets Committee. Phlx proposes to clarify the 
requirement that the Quality of Markets Committee include at least as 
many Independent members \129\ as it does the ``combined number'' of 
Stockholder-chosen members and members who are Members of the 
Exchange.\130\ The addition of the language ``combined number'' makes 
clear that the number of Stockholder-chosen committee members \131\ are 
added to the number of Members serving on the committee \132\ and that 
total is then compared to the number of ``Independent'' committee 
members, who do not have to be Governors.
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    \129\ ``Independent'' committee members would be ``Independent'' 
within the meaning of Section 1-1(o) of the By-Laws.
    \130\ See proposed Section 10-21 of the By-Laws.
    \131\ NASDAQ OMX, as Stockholder, would select the Stockholder 
member(s) of this committee. See Notice, supra note 3, 73 FR 23296.
    \132\ The Board would select the Member(s) serving on the 
committee pursuant to Section 10-1(b) of the By-Laws.
---------------------------------------------------------------------------

    Additionally, the Exchange proposes to adopt a new requirement that 
at least 20% of the total number of committee members be Members.\133\ 
This is designed to provide fair representation of Phlx members on this 
committee and harmonize the role of the committee with that of the 
NASDAQ Exchange's Quality of Markets Committee.\134\
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    \133\ See proposed Section 10-21 of the By-Laws.
    \134\ See NASDAQ Exchange By-Law Article III, Section 6. See 
supra text accompanying notes 95 and 97-100.
---------------------------------------------------------------------------

6. Officers of the Exchange
    The Exchange proposes various changes with respect to officers of 
the Exchange. First, the Exchange proposes to separate the roles of 
Chairman of the Board and CEO. The CEO would be ineligible to serve as 
Chair of the Board,\135\ and the By-Laws would be amended to describe 
separately the responsibilities of the Chair of the Board and the 
CEO.\136\
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    \135\ The Board would select its Chair from among the 
Independent Governors. See proposed Section 5-2 of the By-Laws.
    \136\ See proposed Sections 5-2 and 5-4 of the By-Laws. Under 
the current By-Laws, only the responsibilities of the Chairman of 
the Board are described (in Section 5-1 of the By-Laws).
---------------------------------------------------------------------------

    Second, under the proposed rule change, the Board, instead of the 
CEO/Chairman, would appoint all officers of the Exchange, and would fix 
their duties, responsibilities, and terms of appointment.\137\
---------------------------------------------------------------------------

    \137\ See proposed Sections 5-1, 5-4, 5-5, 5-8, 5-9 and 5-10 of 
the By-Laws.
---------------------------------------------------------------------------

    Third, Phlx proposes to set forth in detail the powers and duties 
relating to the Chair, Vice-Chair, and officers of the Exchange.\138\
---------------------------------------------------------------------------

    \138\ See Article V of the By-Laws. These provisions are 
intended to be generally consistent with current NASDAQ OMX By-Law 
Article VII, and NASDAQ Exchange By-Law Article IV.
---------------------------------------------------------------------------

    Fourth, the Exchange proposes to create an office of the President 
who would, in the absence of the Chair of the Board and the CEO, 
preside at all meetings of the Board at which the President is present. 
Additionally, the President would have all powers and duties usually 
incident to the office of the President, except as specifically limited 
by the Board, and would be charged with general supervision of Exchange 
operations.\139\ The Exchange also proposes to delete current Section 
5-5 of the By-Laws, which addresses contingencies in the event the 
Chairman of the Board is unable to serve. The elimination of this 
provision reflects the changes to the role of the Chair of the Board 
and the creation of a separate CEO position, as well as the new 
position of President.
---------------------------------------------------------------------------

    \139\ See proposed Section 5-5 of the By-Laws.
---------------------------------------------------------------------------

    The Commission finds that these proposed changes are consistent 
with the Act, including Section 6(b)(1) of the

[[Page 42883]]

Act, which requires, among other things, that a national securities 
exchange be organized to carry out the purposes of the Act and comply 
with the requirements of the Act. Under these circumstances, the 
Commission believes that the creation of an independent Chair of the 
Board should foster a greater degree of independent decision-making by 
the governing body of the Exchange and mitigate the conflict between an 
SRO's regulatory functions on the one hand, and its business operations 
on the other.

D. Interpretations of and Amendments to the By-Laws

    The Exchange proposes to clarify the process governing By-Law 
interpretations and amendments. With respect to interpretations, 
Section 4-17 of the By-Laws grants to the Board power to interpret the 
By-Laws and rules adopted pursuant thereto, and provides that any such 
interpretations are final, binding, and conclusive. Phlx proposes to 
clarify that the Board must determine affirmatively whether such 
interpretations must be filed with the Commission as proposed rule 
changes, and, if so, provides that any such interpretation not become 
effective until filed with, or filed with and approved by, the 
Commission.\140\
---------------------------------------------------------------------------

    \140\ See proposed Section 4-17 of the By-Laws.
---------------------------------------------------------------------------

    With respect to amendments, Section 22-1 currently allows the By-
Laws to be amended by either: (1) An affirmative vote of a majority of 
the entire Board at any regular or special meeting of the Board; or (2) 
the affirmative vote of the holders of a majority of the shares of 
common stock of the Exchange then issued and outstanding at any regular 
or special meeting of the Stockholders. The Exchange proposes to amend 
this provision to state affirmatively that By-Law amendments must be 
filed with, or filed with and approved by, the Commission. The Exchange 
also proposes to require that both the Board and the holder of common 
stock of the Exchange approve proposed By-Law amendments.\141\
---------------------------------------------------------------------------

    \141\ See proposed Section 22-1 of the By-Laws. Under the 
current provision, By-Law amendments must be approved by either the 
Board or the holders of a majority of common stock of the Exchange. 
The Commission notes that Stockholder approval could be obtained 
outside of a regular or special meeting of the Stockholders by 
unanimous written consent pursuant to proposed Section 28-13 of the 
By-Laws.
---------------------------------------------------------------------------

    The Commission finds that proposed Sections 4-17 and 22-1 of the 
By-Laws are consistent with Section 6(b)(1) of the Act,\142\ because 
they reflect the obligation of the Board to ensure compliance with the 
rule filing requirements under the Act. Additionally, the Commission 
finds these changes to be consistent with Section 19(b)(1) of the Act 
and Rule 19b-4 under the Act, which require that an SRO file with the 
Commission all proposed rules, as well as all proposed changes in, 
additions to, and deletions of its existing rules. These provisions 
clarify that certain By-Law interpretations and all By-Law amendments 
constitute proposed rule changes within the meaning of Section 19(b)(2) 
of the Act and Rule 19b-4 under the Act,\143\ and obligate the 
Exchange's Board to affirmatively make those determinations.
---------------------------------------------------------------------------

    \142\ 15 U.S.C. 78f(b)(1).
    \143\ See Section 3(a)(27) of the Act (defining proposed rule 
change).
---------------------------------------------------------------------------

E. Other Changes

1. Provisions Applicable to Common Stock
    Phlx proposes a number of changes that reflect the proposed 
ownership by NASDAQ OMX of all the common stock of the Exchange. For 
example, Phlx proposes to delete the following provisions: (1) Article 
FOURTH(b)(iv) of the Certificate, which requires written notice to the 
Board of intention to acquire more than 5% of the Exchange's 
outstanding common stock; (2) Section 29-1 of the By-Laws, which 
requires that sales, transfers, and other dispositions of common stock 
be in blocks of 100 shares; (3) Section 29-2 of the By-Laws, governing 
lockups; (4) Section 29-5 of the By-Laws, regarding reimbursement for 
expenses incurred in connection with any transfer of capital stock; (5) 
Section 30-1 of the By-Laws, regarding stock certificates; (6) Section 
30-2 of the By-Laws, concerning closing of the transfer books and 
determination of record dates; and (7) Article FOURTH(c)(v)(C) of the 
Certificate and Sections 29-4 and 30-3 of the By-Laws, which allow the 
Exchange to not register any transfer of capital stock of the Exchange 
that violates certain provisions of the Certificate or By-Laws. 
Additionally, existing provisions in Article XXIX of the By-Laws that 
contemplate a possible public offering of the Exchange's stock would be 
deleted and replaced with restrictions on stock transfer discussed 
above.\144\ Because these provisions are applicable to non-public 
companies with several stockholders, the Exchange does not believe 
these provisions would be applicable following the Merger. In addition, 
the Exchange proposes to delete provisions that govern the use of 
common stock and/or common stock option incentive compensation that may 
be awarded to Governors and officers of the Exchange,\145\ because such 
compensation would no longer be feasible if NASDAQ OMX owned 100% of 
the common stock of the Exchange.\146\ The Commission finds that the 
elimination of these obsolete provisions are consistent with the Act 
and do not raise any novel regulatory issues.
---------------------------------------------------------------------------

    \144\ See supra notes 33-43 and accompanying text (discussing 
the proposed limits on issuing, transferring, and assigning Phlx 
capital stock).
    \145\ See Section 6-1 of the By-Laws.
    \146\ The Exchange notes that, in the future, potential equity 
stock compensation would likely consist of NASDAQ OMX stock. See 
Notice, supra note 3, 73 FR at 23295.
---------------------------------------------------------------------------

2. Specified Board Votes
    Sections 13-5,\147\ 13-7,\148\ 17-4,\149\ and 18-3 \150\ of the By-
Laws reference an affirmative vote of either 14 or 15 Governors, which 
used to represent a supermajority of the Board. The Exchange proposes 
to modify these provisions to remove the numerical reference and 
instead require an affirmative vote of a majority of all Governors. 
This change is consistent with the governing documents of Phlx's 
proposed parent company, NASDAQ OMX, where a supermajority vote is 
required only when the voting power of the then-outstanding stock 
entitled to vote is implicated.\151\ The Commission finds that these 
changes maintain the requirement of a minimum majority Board vote and 
are consistent with Section 6 of the Act.
---------------------------------------------------------------------------

    \147\ Section 13-5 of the By-Laws (Liability of Officers, 
Directors and Substantial Stockholders) imposes personal liability 
on officers, directors, and substantial stockholders of a Member 
Organization that is an Exchange Member when that corporation 
violates the By-Laws or the Rules. The Board, however, may vote to 
relieve the person of such personal liability.
    \148\ Section 13-7 of the By-Laws (Violation of Terms of 
Registration) provides the Board may vote to terminate the 
registration of a Member Organization for violating or failing to 
meet of the terms and conditions of its registration.
    \149\ Section 17-4 of the by-Laws (Time for Settlement of 
Insolvent Member or Participant) allows for the termination of a 
permit or participation when a Member or foreign currency options 
participant whose permit or rights and privileges have been 
suspended fails to settle with his creditors and apply for 
reinstatement within six months from the time of such suspension (or 
within such further time as the Board of Governors grants) or fails 
to obtain reinstatement. The Board, however, may vote to grant to 
extend the time for settlement.
    \150\ Section 18-3 of the By-Laws (Responsibility of Member or 
Participant for Acts of His Organization) imposes personal liability 
on a Member or foreign currency options participant that is a 
general partner in a Member Organization or participant organization 
for violations of the By-Laws or Rules by the partnership. The 
Board, however, may vote to relieve the general partner of such 
personal liability or reduce the amount of such liability.
    \151\ See, e.g., Section 4.6 of the NASDAQ OMX By-Laws.

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[[Page 42884]]

3. Capital Stock
    The Exchange proposes to eliminate the current provisions of 
Article XXIX of the By-Laws that govern restrictions on transfers of 
capital stock of the Exchange. The proposed new provisions of Article 
XXIX include but are not limited to transfer restrictions on the 
capital stock of the Exchange.\152\ In particular, proposed Sections 
29-1, -2, -3, -5, -6, and -7 address stock certificates, stock ledgers, 
transfers of stock, and record date, respectively. The Exchange states 
that these are standard provisions for a Delaware stock corporation and 
contemplate ownership of all common stock of the Exchange by NASDAQ 
OMX.\153\ The Commission notes that these new provisions are based on 
NASDAQ OMX By-Law Article IX, Capital Stock, Sections 9.1 through 9.7. 
The Commission finds that these changes are consistent with Section 6 
of the Act and do not raise any novel regulatory issues.
---------------------------------------------------------------------------

    \152\ The proposed restrictions on Phlx capital stock are 
discussed supra notes 33, 43, and accompanying text.
    \153\ See Notice, supra note 3, 73 FR at 23297.
---------------------------------------------------------------------------

4. Payment of Dividends
    Proposed Section 29-8 of the By-Laws, which is similar to Section 
15 of the LLC Agreement of the NASDAQ Exchange, would prohibit the 
Exchange from using Regulatory Funds to pay dividends.\154\ The 
Commission finds that the prohibition on the use of regulatory fines, 
fees, or penalties to fund dividends is consistent with Section 6(b)(1) 
of the Act because it will further Phlx's ability to effectively comply 
with its statutory obligations and is designed to ensure that the 
regulatory authority of the Exchange is not improperly used.\155\ This 
restriction on the use of regulatory funds is intended to preclude Phlx 
from using its authority to raise regulatory funds for the purpose of 
benefiting its shareholders, or for other non-regulatory purposes, such 
as to fund executive compensation.
---------------------------------------------------------------------------

    \154\ Proposed Section 1-1(kk) of the By-Laws defines 
``Regulatory Funds'' as fees, fines, or penalties derived from the 
regulatory operations of the Exchange. However, Regulatory Funds do 
not include revenues derived from listing fees, market data 
revenues, transaction revenues, or any other aspect of the 
commercial operations of the Exchange even if a portion of such 
revenues are used to pay costs associated with the regulatory 
operations of the Exchange. See id.
    \155\ See, e.g., Securities Exchange Act Release No. 51029 
(January 12, 2005), 70 FR 3233, 3241 (January 21, 2005) (SR-ISE-
2004-29) (approving an International Securities Exchange, LLC rule 
interpretation that requires that revenues received from regulatory 
fees or regulatory penalties be segregated and applied to fund the 
legal, regulatory, and surveillance operations of the Exchange and 
not used to pay dividends to the holders of Class A Common Stock).
---------------------------------------------------------------------------

5. Special Meetings
    Current Section 4-14 of the By-Laws empowers only the Chairman of 
the Board or, in certain, circumstances, the Vice-Chairman of the 
Board, to call special meetings of the Board. The Exchange proposes to 
broaden this provision to also allow the interim Chair of the Board to 
call special meetings of the Board, under certain circumstances. The 
Commission finds that this proposal is consistent with Section 6(b)(1) 
of the Act, which requires a national securities exchange to be 
organized in such a way so as to be capable of carrying out the 
purposes of the Act. In particular, the Commission believes that this 
change will provide additional flexibility where appropriate to the 
Board to convene special meetings to conduct the business of the 
Exchange.
6. Annual Report and Weekly Bulletin
    Section 4-21 of the By-Laws requires the distribution of an annual, 
independently-audited financial report of the Exchange to Stockholders, 
Members, participants, Member Organizations, and participant 
organizations. Phlx proposes to delete this requirement and instead 
require that annual financial reports be kept on file at the Exchange 
and made available for inspection upon request to any Stockholder, 
Member, participant, Member Organization, or participant organization. 
The Exchange states that financial information on the Exchange also 
would be reflected in the public consolidated financial statements of 
NASDAQ OMX once the Merger is complete, and the Commission notes that 
this proposal does not affect the requirement that Phlx comply with 
Rule 6a-2 under the Act to amend its Form 1.\156\ Further, Phlx 
proposes to change how its Weekly Bulletin is distributed. Section 12-
5(d) of the By-Laws provides that it must be mailed, and the Exchange 
proposes to update this provision to permit distribution by e-mail and 
posting on the Exchange's Web site. The Commission finds that these 
changes are consistent with Section 6 of the Act and do not raise any 
novel regulatory issues.
---------------------------------------------------------------------------

    \156\ 17 CFR 249.1.
---------------------------------------------------------------------------

7. Stock Exchange Fund and Gratuity Fund
    The Exchange proposes to eliminate Sections 9-1 through 9-6 of the 
By-Laws relating to the Stock Exchange Fund.\157\ The purpose of the 
Stock Exchange Fund is to appoint trustees to manage the investment of 
certain funds of the Exchange and collect interest, dividends, and 
income from the funds for the Exchange. The Exchange believes these 
provisions are unnecessary because, after the Merger, the financial 
management of the Exchange will be overseen directly by the Board and 
subject to public company financial controls established by NASDAQ OMX. 
Similarly, the Exchange proposes to delete a provision in Section 4-4 
of the By-Laws relating to the gratuity fund. This provision is 
obsolete, as the Exchange states that the fund no longer exists.\158\
---------------------------------------------------------------------------

    \157\ Correspondingly, the Exchange proposes to delete 
references to the Stock Exchange Fund in Section 4-4 of the By-Laws.
    \158\ See Notice, supra note 3, 73 FR at 23295, n.31.
---------------------------------------------------------------------------

8. Miscellaneous Changes
    Additionally, the Exchange proposes to make the following changes 
to the Certificate and By-Laws to correct typographical errors, effect 
stylistic changes, move text, and/or update the language to more 
accurately reflect current practices. The Exchange proposes to:
     Change the title of the Certificate;
     Update the address of its registered office in Delaware; 
\159\
---------------------------------------------------------------------------

    \159\ See proposed Article SECOND of the Certificate.
---------------------------------------------------------------------------

     Correct an error by changing the term ``Board of 
Directors'' to ``Board of Governors;'' \160\
---------------------------------------------------------------------------

    \160\ See Article FOURTH of the Certificate.
---------------------------------------------------------------------------

     Update cross-references; \161\
---------------------------------------------------------------------------

    \161\ See proposed Article FOURTH(b)(iii) of the Certificate and 
proposed Sections 1-1(w) of the By-Laws.
---------------------------------------------------------------------------

     Add new definitions to its By-Laws and Rules; \162\
---------------------------------------------------------------------------

    \162\ For example, the Exchange proposes to add a definition of 
the terms: ``Commission;'' ``NASDAQ OMX Merger'' (Phlx also proposes 
to define the term ``NASDAQ OMX Merger'' in its proposed Rule 
1(qq)); ``Regulatory Funds;'' ``Preferred Stock;'' and ``Trust,'' 
and update the definition of the term ``Trust Agreement.'' 
Additionally, Phlx would eliminate the defined term ``Class A Common 
Stock'' and modify the term ``Common Stock,'' in accordance with its 
proposal to issue only one class of common stock. The Exchange also 
proposes to modify the definitions of ``Member Governor'' and 
``Stockholder Governor'' to correspond with its proposal to decrease 
the number of Member Governors from two to one, and the number of 
Stockholder Governors from six to one.
---------------------------------------------------------------------------

     Eliminate certain language from the Certificate that is 
also in the By-Laws; \163\
---------------------------------------------------------------------------

    \163\ The language in Article SIXTH(b)(i)-(ii) of the 
Certificate, which Phlx proposes to eliminate, is also in Section 4-
4(b)(ix)-(x) of the By-Laws.
---------------------------------------------------------------------------

     Replace the term ``Chairman'' with ``Chair'' in 
referencing the head of the

[[Page 42885]]

Board \164\ and the heads of Board committees; \165\
---------------------------------------------------------------------------

    \164\ See, e.g., proposed Section 4-11 of the By-Laws.
    \165\ See, e.g., proposed Section 8-1 of the By-Laws.
---------------------------------------------------------------------------

     Replace the term ``Vice-Chairman'' with ``Vice-Chair;'' 
\166\
---------------------------------------------------------------------------

    \166\ See, e.g., proposed Section 4-14 of the By-Laws.
---------------------------------------------------------------------------

     Replace references to the ``director'' of either the 
Membership Services or Examinations Departments in Sections 17-1 and 
17-3 of the By-Laws with more general references to the departments; 
\167\
---------------------------------------------------------------------------

    \167\ Under the proposed rule, notices would still be required 
to be sent to these departments, but not necessarily to the 
director.
---------------------------------------------------------------------------

     Replace the terms ``Stockholder'' and ``Stockholders'' 
with stockholder and stockholders, respectively; \168\
---------------------------------------------------------------------------

    \168\ See, e.g., Article TENTH of the Certificate. The term 
``Stockholder Governor'' would remain, although the term 
``Stockholder Governors'' would be made singular (i.e., 
``Stockholder Governor'') to reflect the Exchange's proposal to 
reduce the number of such Governors from six to one.
---------------------------------------------------------------------------

     Replace ``without'' with ``outside of'' in Article TWELFTH 
of the Certificate;
     Use the defined term ``Member'' (instead of ``member'') in 
the definition of ``non-member;'' \169\
---------------------------------------------------------------------------

    \169\ See proposed Sections 1-1(o), 1-1(y), 3-12(a), 10-14(d), 
12-7, 13-1, 13-5, 13-8, 14-11, 16-1, and 20-3 of the By-Laws.
---------------------------------------------------------------------------

     Use the term ``Member Organization'' instead of ``member 
organization;'' \170\
---------------------------------------------------------------------------

    \170\ See proposed Sections 4-6(b), 10-14(d), 10-17, and 17-2 
(adding both Member Organization and participant organization) of 
the By-Laws.
---------------------------------------------------------------------------

     Update the definition of ``Trust Agreement;'' \171\ and
---------------------------------------------------------------------------

    \171\ See proposed Section 1-1(ee) of the By-Laws.
---------------------------------------------------------------------------

     Correct typographical errors in Section 4-4 of the By-Laws 
(i.e., add ``the'' to (b)(i), add ``a'' to (b)(vi), and replace 
``also'' with ``and.''
    The Commission finds these changes to be consistent with Section 6 
of the Act generally, including Section 6(b)(1). The proposed minor 
changes update the Exchange's governing documents and make them more 
internally consistent, and thereby facilitate Members' understanding of 
their obligations and the Exchange's ability to administer its rules.

F. Changes to Exchange Rules

    The Exchange proposes to amend Rule 98 (Emergency Committee) to 
provide the Board with discretion concerning the composition of the 
Emergency Committee. Currently, the composition of the Emergency 
Committee is fixed to consist of the Chairman of the Board, the On-
Floor Vice-Chairman of the Exchange, the Off-Floor Vice-Chairman of the 
Exchange,\172\ and the Chairmen of the Options and Foreign Currency 
Options Committees. The Commission notes that other exchanges also have 
an emergency committee whose composition is determined by the board of 
the exchange.\173\ The Commission believes that the proposed changes to 
Rule 98 (Emergency Committee) should provide the Board with greater 
flexibility to manage the affairs of the Exchange in an emergency and 
are consistent with Sections 6(b)(1) of the Act,\174\ which requires, 
among other things, a national securities exchange to be so organized 
and have the capacity to carry out the purposes of the Act.
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    \172\ The Exchange states that the position of Off-Floor Vice-
Chairman of the Exchange no longer exists and reference to this 
position remained in Rule 98 inadvertently. See Notice, supra note 
3, 73 FR at 23297.
    \173\ See, e.g., American Stock Exchange LLC Constitution, 
Article XII, Emergency Committee.
    \174\ 15 U.S.C. 78f(b)(1).
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    The Exchange also proposes to amend Rule 164 (Trading Halts) to 
provide the Board with discretion in designating the officers of the 
Exchange responsible for declaring any trading halts when in their 
opinion such suspension would be in the public interest. Currently, 
only the Chairman and Chief Executive Officer or his designee has the 
authority to suspend trading pursuant to Rule 164. The Commission 
believes that the proposed change to Rule 164 (Trading Halts) is 
consistent with the Act, and in particular with Sections 6(b)(1) and 
6(b)(5) of the Act,\175\ which require, among other things, that an 
exchange be organized and have the capacity to carry out the purposes 
of the Act and have rules designed to prevent fraudulent and 
manipulative acts and practices, promote just and equitable principles 
of trade, remove impediments and to perfect the mechanism of a free and 
open market and a national market system, and in general, to protect 
investors and the public interest, because it will continue to allow 
the Exchange to respond in a timely manner, consistent with the 
Exchange's rules, to a situation where suspension of trading would be 
in the public interest. Currently, the Chairman and Chief Executive 
Officer \176\ is authorized to suspend trading pursuant to Rule 164 or 
to delegate that power to another individual.\177\ The Commission 
believes that, by making the Board responsible for trading suspension 
decisions, or alternatively for deciding to which Exchange officers 
that authority should be delegated, the proposal strengthens Board 
oversight of decisions to halt trading and makes Rule 164 less 
susceptible to any potential abuse of discretion.
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    \175\ 15 U.S.C. 78f(b)(1) and 15 U.S.C. 78f(b)(5), respectively.
    \176\ Under the proposed rule change, there would no longer be 
one position entitled ``Chairman and Chief Executive Officer.'' See 
supra Section III.C.7 and more specifically note 136 and 
accompanying text (explaining the proposal to separate the roles of 
Chairman and Chief Executive Officer).
    \177\ See Securities Exchange Act Release No. 54538 (September 
28, 2006), 71 FR 59184, 59188 (October 6, 2006) (SR-Phlx-2006-43) 
(approving current Rule 164).
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    Finally, the Exchange proposes to add to Rule 1 (Definitions) a 
definition of the NASDAQ OMX Merger.\178\ The Exchange also proposes to 
amend Rule 972 (Continuation of Status After the NASDAQ OMX Merger) to 
reflect that current members, inactive nominees, member organizations, 
foreign currency options participants, foreign currency options 
participant organizations, as well as approved lessors of foreign 
currency options participations holding such status prior to the Merger 
would continue to hold such status following the Merger.\179\ This 
change clarifies that current members and participants would continue 
in their current status following the Merger and would continue to have 
uninterrupted access to the Exchange.\180\
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    \178\ See proposed Rule 1(qq).
    \179\ This provision was adopted in connection with, and 
currently refers to, the Exchange's 2004 demutualization.
    \180\ This provision was adopted in connection with, and 
currently refers to, the Exchange's 2004 demutualization.
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G. Additional Reporting Requirements for Listing Affiliated Securities

    The Exchange proposes to adopt new Rule 990, which is based on 
NASDAQ Exchange Rule 4370.\181\ Rule 990 would impose heightened 
requirements on Phlx if it lists a security of NASDAQ OMX or any of its 
affiliates (``Nasdaq Affiliates''). In the event that a Nasdaq 
Affiliate lists a security (the ``Affiliate Security'') on Phlx, the 
proposed rule would require Phlx to file a report with the Commission 
on a quarterly basis detailing Phlx's monitoring of: (1) The Nasdaq 
Affiliate's compliance with the provisions of the Rule 800 Series; and 
(2) the trading of the Affiliate Security, including summaries of all 
related surveillance alerts, complaints, regulatory referrals, trades 
cancelled or adjusted pursuant to Rule 163, investigations, 
examinations, formal and informal disciplinary actions, exception 
reports and trading data.
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    \181\ See NASDAQ Exchange Rule 4370. See also NYSE Rule 497, 
Additional Requirements for Listed Securities Issued by NYSE 
Euronext or its Affiliates.

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[[Page 42886]]

    The Exchange also would be required to notify the Commission at the 
same time it notifies the Nasdaq Affiliate if the Exchange determines 
that the Nasdaq Affiliate was not in compliance with any of its listing 
standards. Phlx would be required to notify the Commission within five 
business days of its receipt of a plan of compliance from the Nasdaq 
Affiliate and advise the Commission on whether the plan of compliance 
was accepted by Phlx or what other action was taken with respect to the 
plan, and the time period provided to regain compliance with the Rule 
800 Series, if any.
    In addition, the Exchange would be required to commission an annual 
review and report by an independent accounting firm of the compliance 
of the Affiliate Security with the Rule 800 Series. The Exchange would 
be required to furnish promptly a copy of the report to the Commission.
    The listing of an Affiliate Security on Phlx could potentially 
create a conflict of interest between the Phlx's regulatory 
responsibilities to vigorously oversee the listing and trading of an 
Affiliate Security on Phlx, and its own commercial or economic 
interests. Such listing may raise questions as to the Phlx's ability to 
independently and effectively enforce the Commission's and the 
Exchange's rules against a Nasdaq Affiliate. Proposed Rule 990 is 
designed to address this concern.
    The Commission finds that that proposed Rule 990 is consistent with 
Sections 6(b)(1) and 6(b)(5) of the Act \182\ because it requires 
heightened reporting by Phlx to the Commission with respect to 
oversight of the listing and trading on Phlx of an Affiliate Security 
and will assist Phlx in effectively enforcing its Rules with respect to 
the listing and trading of these securities. In addition, the 
requirement that an independent accounting firm review such issuer's 
compliance with Phlx's listing standards adds a degree of independent 
oversight to Phlx's regulation of the listing of these securities, 
which may mitigate any potential or actual conflicts of interest and 
should help ensure thorough oversight of the Affiliate Security on the 
same basis as any other listed security.
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    \182\ 15 U.S.C 78f(b)(1) and 15 U.S.C. 78f(b)(5), respectively.
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H. Restriction on Affiliation with NASDAQ OMX

1. Limitation on Phlx Members' Ownership of NASDAQ OMX
    The Exchange proposes to adopt new Rule 985(a) to prohibit Members 
\183\ and persons associated with Members from beneficially owning more 
than 20% of the then-outstanding voting securities of NASDAQ OMX.\184\ 
Members that trade on an exchange traditionally had ownership interests 
in such exchange. As the Commission has noted in the past, however, a 
member's interest in an exchange could become so large as to cast doubt 
on whether the exchange can fairly and objectively exercise its self-
regulatory responsibilities with respect to that member.\185\ A member 
that is a controlling shareholder of an exchange or an exchange's 
holding company might be tempted to exercise that controlling influence 
by pressuring or directing the exchange to refrain from, or the 
exchange otherwise may hesitate to, diligently monitor and surveil the 
member's conduct or diligently enforce its rules and the federal 
securities laws with respect to conduct by the member that violates 
such provisions.\186\
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    \183\ The Rules use the term ``members'' to refer to members of 
the Exchange (previously defined as ``Members'').
    \184\ See proposed Rule 985(a).
    The Commission also notes that NASDAQ OMX's Restated Certificate 
of Incorporation imposes limits on direct and indirect changes in 
control that are designed to prevent any shareholder from exercising 
undue control over the operation of the exchange and to ensure that 
the exchange and the Commission are able to carry out their 
regulatory obligations under the Act. Specifically, no person, which 
would include any Member, who beneficially owns shares of common 
stock, preferred stock, or notes in excess of five percent of the 
securities generally entitled to vote may vote the shares in excess 
of five percent. See NASDAQ OMX Certificate of Incorporation Article 
Fourth.C.
    \185\ See Securities Exchange Act Release Nos. 57478 (March 12, 
2008), 73 FR 14521, 14523 (March 18, 2008) (SR-NASDAQ-2007-004 and 
SR-NASDAQ-2007-080); 55389 (March 2, 2007) 72 FR 10575, 10578 (March 
8, 2007) (SR-CBOE-2006-110); 55293 (February 14, 2007), 72 FR 8033, 
8037 (February 22, 2007) (SR-NYSE-2006-120); 53382 (February 27, 
2006), 71 FR 11251, 11257 (March 6, 2006) (SR-NYSE-2005-77); 53128 
(January 13, 2006), 71 FR 3550 (January 23, 2006) (File No. 10-131); 
51149 (February 8, 2005), 70 FR 7531, 7538 (February 14, 2005) (SR-
CHX-2004-26); 49718 (May 17, 2004), 69 FR 29611, 29624 (May 24, 
2004) (SR-PCX-2004-08); 49098, supra note 5 at 3986; and 49067 
(January 13, 2004), 69 FR 2761, 2767 (January 20, 2004) (SR-BSE-
2003-19).
    \186\ See, e.g., Securities Exchange Act Release No. 49718, 
supra note 185 at 29624.
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    The Commission finds that the ownership restriction in proposed 
Rule 985(a), combined with the voting limitations in NASDAQ OMX's 
Certificate of Incorporation Article Fourth.C and By-Law 12.5,\187\ is 
consistent with the Act, including Sections 6(b)(1) and 6(b)(5) of the 
Act. These limitations should minimize the potential that a Phlx member 
could improperly interfere with or restrict the ability of the 
Commission or the Exchange to effectively carry out their regulatory 
oversight responsibilities under the Act.
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    \187\ See supra Section III.B (discussing the voting limits 
applicable to NASDAQ OMX securities).
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2. Limitations on Affiliation between Phlx and Its Members
    Proposed Rule 985(b) would prohibit Phlx or an entity with which it 
is affiliated from acquiring or maintaining an ownership interest in, 
or engaging in a business venture \188\ with, a Phlx member or an 
affiliate of a Phlx member in the absence of an effective filing with 
the Commission under Section 19(b) of the Act.\189\ Further, the rule 
would prohibit a Phlx member from becoming an affiliate of Phlx or an 
affiliate of an entity affiliated \190\ with Phlx in the absence of an 
effective filing under Section 19(b) of the Act. However, Rule 985(b) 
would exclude from this restriction two types of affiliations.
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    \188\ Phlx would define a ``business venture'' as an arrangement 
under which (A) Phlx or an entity with which it is affiliated and 
(B) a Member or an affiliate of a Member, engage in joint activities 
with the expectation of shared profit and a risk of shared loss from 
common entrepreneurial efforts. See proposed Rule 985(b)(i).
    \189\ 15 U.S.C. 78s(b).
    \190\ Phlx defines the term ``affiliate'' under proposed Rule 
985(b) as having the meaning specified in Rule 12b-2 under the Act; 
provided, however, that for purposes of Rule 985(b), one entity 
shall not be deemed to be an affiliate of another entity solely by 
reason of having a common director.
---------------------------------------------------------------------------

    First, a Phlx member or an affiliate of a Phlx member could acquire 
or hold an equity interest in NASDAQ OMX that is permitted pursuant to 
proposed Rule 985(a) (i.e., less than 20% of the outstanding voting 
securities) without the need for the Exchange to file such acquisition 
or holding under Section 19(b) of the Act.\191\ Second, Phlx or an 
entity affiliated with Phlx could acquire or maintain an ownership 
interest in, or engage in a business venture with, an affiliate of a 
Phlx member without the need for the Exchange to file such affiliation 
under Section 19(b) of the Act, if there were information barriers 
between the member and Phlx and its facilities. These information 
barriers would have to prevent the member from having an 
``informational advantage'' concerning the operation of Phlx or its 
facilities or ``knowledge in advance of other Phlx members'' of any 
proposed

[[Page 42887]]

changes to the operations of Phlx or its trading systems. Further, Phlx 
may only notify an affiliated member of any proposed changes to its 
operations or trading systems in the same manner as it notifies non-
affiliated members. Additionally, Phlx and its affiliated member may 
not share employees, office space, or data bases. Finally, the Board 
must certify, annually, that Phlx has taken all reasonable steps to 
implement, and comply with, the rule.
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    \191\ As discussed above, proposed Rule 985(a) provides that 
``[n]o member or person associated with a member shall be the 
beneficial owner of greater than twenty percent (20%) of the then-
outstanding voting securities of The NASDAQ OMX Group Inc.''
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    Proposed Rule 985 is based on the rules of Nasdaq, which the 
Commission previously found consistent with the Act.\192\ The 
Commission similarly finds that proposed Rule 985 is consistent with 
the requirements of Section 6(b)(5) of the Act, which requires that an 
exchange have rules designed, among other things, to promote just and 
equitable principles of trade, to remove impediments and to perfect the 
mechanism of a free and open market and a national market system, and 
in general, to protect investors and the public interest.\193\
---------------------------------------------------------------------------

    \192\ See Nasdaq Rule 2130 and Securities Exchange Act Release 
No. 53128, supra note 101. See also Nasdaq Rule 2140 and Securities 
Exchange Act Release No. 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).
    \193\ 15 U.S.C. 78f(b)(5).
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    The Commission is concerned about the potential for unfair 
competition and conflicts of interest between an exchange's self-
regulatory obligations and its commercial interests that could exist if 
an exchange were to otherwise become affiliated with one of its 
members, as well as the potential for unfair competitive advantage that 
the affiliated member could have by virtue of informational or 
operational advantages, or the ability to receive preferential 
treatment.\194\ The Commission believes that Phlx's proposed rule is 
designed to mitigate these concerns by requiring that Phlx file a 
proposed rule change in connection with proposed affiliations between 
Phlx and Members unless such affiliation is due to a Member's interest 
in NASDAQ OMX permitted under proposed Rule 985(a) or conforms to the 
specified information barrier requirements.
---------------------------------------------------------------------------

    \194\ See Securities Exchange Act Release No. 53382 (February 
27, 2006), 71 FR 11251 (March 6, 2006) (SR-NYSE-2005-77) (order 
approving the New York Stock Exchange, Inc.'s merger with 
Archipelago Holdings, Inc.). See also Securities Exchange Act 
Release No. 54170 supra note 192 (order approving Nasdaq's proposal 
to adopt a similar rule, Nasdaq Rule 2140, restricting affiliations 
between Nasdaq and its members).
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    If Phlx entered into an affiliation with a member (or any other 
party) that resulted in a change to a Rule or the need to establish new 
Rules, as defined under the Act, then such affiliation would be subject 
to the requirements of Section 19(b) of the Act and Rule 19b-4 
thereunder. Proposed Rule 985(b) would not affect this statutory rule 
filing requirement.
3. Exceptions to Limitations on Affiliation Between Phlx and Its 
Members
    NASDAQ OMX currently owns two broker-dealers: NES and NASDAQ 
Options Services, LLC (``NOS''). NES and NOS are members of Phlx. 
Absent relief, after the closing of NASDAQ OMX's acquisition of Phlx, 
NASDAQ OMX's ownership of NES and NOS would cause NES and NOS to 
violate the provision in proposed Rule 985(b) prohibiting Members from 
being affiliated with the Exchange.
    Phlx has proposed that NES and NOS be permitted to become 
affiliates of the Exchange, subject to certain conditions and 
limitations. First, Phlx proposes that NES and NOS would only route 
orders to Phlx that first attempt to access liquidity on the NASDAQ 
Exchange.\195\ Second, NES and NOS will remain facilities of the NASDAQ 
Exchange. Under NASDAQ Exchange rules, NES operates as a facility \196\ 
of NASDAQ Exchange and routes orders to other market centers as 
directed by NASDAQ Exchange. Similarly, NOS is operated and regulated 
as a facility of NASDAQ Exchange with respect to its routing of System 
Securities (``NOS facility function''), and, consequently, the 
operation of NOS in this capacity will be subject to Exchange 
oversight, as well as Commission oversight.\197\ NASDAQ Exchange is 
responsible for ensuring that NES and NOS, each a facility of the 
NASDAQ Exchange, are operated consistent with Section 6 of the Act and 
NASDAQ Exchange's rules. In addition, NASDAQ Exchange must file with 
the Commission rule changes and fees relating to NES and NOS. Third, 
use of NES's and NOS's routing function by NASDAQ Exchange members will 
continue to be optional. Parties that do not desire to use NES may 
enter orders into the NASDAQ Exchange as immediate-or-cancel orders or 
any other order-type available through the NASDAQ Exchange that is 
ineligible for routing.\198\ Similarly, NOM participants are not 
required to use NOS to route orders, and a NOM participant may route 
its orders through any available router it selects.\199\ In addition, 
the Commission notes that NES and NOS are members of an SRO 
unaffiliated with the NASDAQ Exchange, which serves as their designated 
examining authority under Rule 17d-1.\200\
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    \195\ NES currently provides to NASDAQ Exchange members optional 
routing services to other market centers, including Phlx, as set 
forth in NASDAQ Exchange's rules. See NASDAQ Exchange Rules 4751, 
4755, and 4758. NOS provides to NASDAQ Exchange members that are 
Nasdaq Options Market (``NOM'') participants routing services to 
other market centers. Pursuant to NASDAQ Exchange's rules, NOS: (1) 
routes orders in options currently trading on NOM, referred to as 
``System Securities;'' and (2) routes orders in options that are not 
currently trading on NOM (``Non-System Securities''). See NOM Rules, 
Chapter VI Sections 1(b) and 11. See also Securities Exchange Act 
Release No. 57478 (March 12, 2008), 73 FR 14521 (March 18, 2008) 
(SR-NASDAQ-2007-004 and SR-NASDAQ-2007-080) (``NOM Approval 
Order''). With respect to System Securities, NOM participants may 
designate orders to be routed to another market center when trading 
interest is not available on NOM or to execute only on NOM. See NOM 
Rules, Chapter VI, Section 11. See also NOM Approval Order, 73 FR at 
14532-14533.
    \196\ See NASDAQ Exchange Rule 4758(b)(3). See also Securities 
Exchange Act Release No. 56708 (October 26, 2007), 72 FR 61925 
(November 1, 2007) (SR-NASDAQ-2007-078) (``NES Routing Release''). 
As a facility of NASDAQ Exchange, NASDAQ Exchange Rule 4758(b) 
acknowledges that NASDAQ Exchange is responsible for filing with the 
Commission rule changes related to the operation of, and fees for 
services provided by, NES and that NES is subject to exchange non-
discrimination requirements.
    \197\ See NOM Rules, Chapter 11(e). See also NOM Approval Order, 
supra note 195, 73 FR at 14533.
    \198\ See NASDAQ Exchange Rule 4758(b)(7).
    \199\ See NOM Rules, Chapter VI, Section 11(a) (allowing 
Participants to designate orders as available for routing or not 
available for routing). See also NOM Approval Order, supra note 195, 
73 FR at 14533, n.91 and accompanying text.
    \200\ See NASDAQ Exchange Rule 4758(b)(4), and NOM Rules, 
Chapter 11(e). See NES Routing Release, supra note 196; and NOM 
Approval Order, supra note 195, 73 FR at 14533, n.189 and 
accompanying text.
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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.\201\ Although the Commission continues to be concerned about 
potential unfair competition and conflict of interest between an 
exchange's self-regulatory obligations and its commercial interest when 
the exchange is affiliated with one of its members, the Commission 
believes that it is appropriate and consistent with the Act to permit 
NES and NOS to become affiliates of Phlx for the limited purpose of 
providing routing services for NASDAQ Exchange for orders that first 
attempt to access liquidity on NASDAQ Exchange's systems before routing 
to Phlx, and in light of the protections afforded by the other 
conditions described above.
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    \201\ See supra note 194 and accompanying text.

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[[Page 42888]]

 III. Accelerated Approval

    The Commission finds good cause, pursuant to Section 19(b)(2) of 
the Act,\202\ for approving the proposal, as modified by Amendment Nos. 
1 and 2, prior to the thirtieth day after the date of publication of 
notice of filing of Amendment No. 2 in the Federal Register.\203\ In 
Amendment No. 2, Phlx proposed to adopt as rules of the Exchange the 
Certificate of Incorporation and By-Laws of NASDAQ OMX. The Certificate 
of Incorporation, as filed by the Exchange, was previously approved by 
the Commission as rules of Nasdaq.\204\ The NASDAQ OMX By-Laws were 
similarly approved by the Commission.\205\ As filed by the Exchange, 
the NASDAQ OMX By-Laws include certain new terminology to reflect the 
acquisition of Phlx by NASDAQ OMX. These changes were filed by NASDAQ 
Exchange as a proposed rule change, and were published for 
comment.\206\ The Commission received no comments on the proposed 
changes to the NASDAQ OMX By-Laws.
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    \202\ 15 U.S.C. 78s(b)(2).
    \203\ Pursuant to Section 19(b)(2) of the Act, 15 U.S.C. 
78s(b)(2), 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 finds good 
cause for so doing.
    \204\ See Securities Exchange Act Release No. 51328, supra note 
101.
    \205\ See id.
    \206\ See Securities Exchange Act Release No. 57761, supra note 
4.
---------------------------------------------------------------------------

    As discussed more fully above and in the NASDAQ Stock Market 
Proposal, certain provisions of NASDAQ OMX's Certificate and By-Laws 
are designed to facilitate the ability of NASDAQ OMX's SRO 
Subsidiaries, including Phlx, to maintain the independence of each of 
the SRO Subsidiaries' self-regulatory function, enable each SRO 
Subsidiary to operate in a manner that complies with the federal 
securities laws, and facilitate the ability of each SRO subsidiary and 
the Commission to fulfill their regulatory and oversight obligations 
under the Act.\207\ As stated above, the Commission finds that such 
provisions are consistent with the Act.\208\ Notably, the NASDAQ OMX 
Certificate and By-Laws are rules of NASDAQ Exchange that have been 
approved previously by the Commission, as noted above, and the changes 
to the NASDAQ OMX By-Laws were published for notice and comment, as 
noted above, and the Commission did not receive any comments thereon. 
Accordingly, the Commission finds good cause for approving the Phlx's 
proposal, as modified by Amendment Nos. 1 and 2, on an accelerated 
basis, pursuant to Section 19(b)(2) of the Act.
---------------------------------------------------------------------------

    \207\ See supra Section III.C.1 (discussing, for example the 
duty of the board, officers, employees and agents NASDAQ OMX to give 
due regard to the preservation of the independence of the Phlx's 
self-regulatory function).
    \208\ See supra note 56 and accompanying text.
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 2, including whether Amendment No. 2 
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-2008-31 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-Phlx-2008-31. 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 available publicly. All 
submissions should refer to File Number SR-Phlx-2008-31 and should be 
submitted on or before August 13, 2008.

V. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change is consistent with the Act and the rules and regulations 
thereunder applicable to a national securities exchange.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\209\ that the proposed rule change (SR-Phlx-2008-31), as modified 
by Amendment Nos. 1 and 2 thereto, be and hereby is approved on an 
accelerated basis.
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    \209\ 15 U.S.C. 78s(b)(2).

    By the Commission.
Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-16760 Filed 7-22-08; 8:45 am]

BILLING CODE 8010-01-P