Document ID: SEC-2006-0286-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: New York Stock Exchange, Inc.
Posted Date: 2006-03-06T05:00Z

[Federal Register: March 6, 2006 (Volume 71, Number 43)]
[Notices]               
[Page 11251-11271]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr06mr06-78]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53382; File No. SR-NYSE-2005-77]

 
Self-Regulatory Organizations; New York Stock Exchange, Inc.; 
Order Granting Approval of Proposed Rule Change and Amendment Nos. 1, 
3, and 5 Thereto and Notice of Filing and Order Granting Accelerated 
Approval to Amendment Nos. 6 and 8 Relating to the NYSE's Business 
Combination With Archipelago Holdings, Inc.

February 27, 2006.

I. Introduction

    On November 3, 2005, the New York Stock Exchange, Inc. (``NYSE'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934, as 
amended (``Act''),\1\ and Rule 19b-4 thereunder,\2\ a proposed rule 
change relating to the NYSE's business combination with Archipelago 
Holdings, Inc. (``Archipelago''). On December 1, 2005, the NYSE filed 
Amendment No. 1 to the proposed rule change. The NYSE filed Amendment 
No. 2 to the proposed rule change on December 12, 2005, and withdrew 
Amendment No. 2 on December 12, 2005. On December 12, 2005, the NYSE 
filed Amendment No. 3.\3\ The NYSE filed Amendment No. 4 to the 
proposed rule change on December 21, 2005, and withdrew Amendment No. 4 
on December 21, 2005. On December 21, 2005, the NYSE filed Amendment 
No. 5.\4\ The proposed rule change, as amended, was published for 
comment in the Federal Register on January 12, 2006.\5\ The Commission 
has received 17 comments on the proposal.\6\

[[Page 11252]]

The NYSE filed a response to comments on February 8, 2006.\7\
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    \1\ 15 U.S.C. 78s(b)(l).
    \2\ 17 CFR 240.19b-4.
    \3\ See Form 19b-4 dated December 12, 2005 (``Amendment No. 
3''). Amendment No. 3 replaced Amendment No. 1 in its entirety.
    \4\ See Partial Amendment dated December 21, 2005 (``Amendment 
No. 5'').
    \5\ See Securities Exchange Act Release No. 53073 (January 6, 
2006), 71 FR 2080 (``Notice'').
    \6\ See letter from Michael Kanovitz, Attorney, Loevy & Loevy, 
to Nancy Morris, Secretary, Commission, dated February 2, 2006, with 
attachments, including a statement from Lewis J. Borsellino to the 
Commission (``Borsellino Letter''); letter from Dennis A. Johnson, 
Senior Portfolio Manager, Corporate Governance, California Public 
Employees' Retirement System, to Jonathan Katz, Secretary, 
Commission, dated February 2, 2006 (``CalPERS Letter''); letter from 
Warren Meyers, President, Independent Broker Action Committee, to 
Jonathan G. Katz, Secretary, Commission, dated December 16, 2005 
(``IBAC December Letter''); letter from Warren P. Meyers, President, 
Independent Broker Action Committee, Inc., to Nancy M. Morris, 
Secretary, Commission, dated February 2, 2006 (``IBAC February 
Letter''); letter from Ari Burstein, Associate Counsel, Investment 
Company Institute, to Nancy M. Morris, Secretary, Commission, dated 
February 2, 2006 (``ICI Letter''); letter from James L. Kopecky, 
James L. Kopecky, P.C., to Christopher Cox, Chairman, Commission, 
dated January 16, 2006, with attachments (``Kopecky Letter''); 
letter from Fane Lozman to Christopher Cox, Chairman, Commission, 
dated February 22, 2006, with attachments (``Lozman Letter''); 
letter from Barbara Z. Sweeney, Senior Vice President and Corporate 
Secretary, NASD, to Nancy M. Morris, Secretary, Commission, dated 
February 16, 2006 (``NASD Letter''); letter from Edward S. Knight, 
Executive Vice President and General Counsel, The Nasdaq Stock 
Market, to Nancy M. Morris, Secretary, Commission, dated January 25, 
2006 (``Nasdaq Extension Letter''); letter from Edward S. Knight, 
The Nasdaq Stock Market, to Nancy M. Morris, Secretary, Commission, 
dated February 2, 2006 (``Nasdaq February Letter''); letter from 
Randall Edwards, President, National Association of State 
Treasurers, to Nancy M. Morris, Secretary, Commission, dated January 
31, 2006 (``NAST Letter''); letter from Philip J. Nathanson, Philip 
J. Nathanson & Associates, to Christopher Cox, Chairman, Commission, 
dated February 2, 2006, with attachments (``Nathanson Letter''); 
letter from ``The Undersigned NYSE Investors'' to Jonathan G. Katz, 
Secretary, Commission, dated December 23, 2005, with attachments 
(``OTR Investors Letter''); letter from Andrew Rothlein to Nancy 
Morris, Secretary, Commission, dated February 12, 2006 (``OTR 
Investors Letter II''); letter from George R. Kramer, Deputy General 
Counsel, Securities Industry Association, to Nancy M. Morris, 
Secretary, Commission, dated January 18, 2006 (``SIA Extension 
Letter''); letter from Marc E. Lackritz, President, Securities 
Industry Association and Micah S. Green, President and CEO, The Bond 
Market Association, to Nancy M. Morris, Secretary, Commission, dated 
February 2, 2006, with attachments (``SIA/TBMA Letter''); and letter 
from Marjorie E. Gross, Senior Vice President & Regulatory Counsel, 
The Bond Market Association, to Nancy M. Morris, Secretary, 
Commission, dated January 23, 2006 (``TBMA Letter'').
    \7\ See letter from Mary Yeager, Assistant Secretary, NYSE, to 
Nancy M. Morris, Secretary, Commission, dated February 7, 2006 
(``NYSE Response to Comments''). See also letter from Kevin J.P. 
O'Hara, Chief Administrative Officer, General Counsel and Secretary, 
to Nancy M. Morris, Secretary, Commission, dated February 24, 2006.
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    On January 20, 2006, the NYSE filed Amendment No. 6 to the proposed 
rule change.\8\ On February 21, 2006, the NYSE filed Amendment No. 7 to 
the proposed rule change, and withdrew Amendment No. 7 on February 22, 
2006. On February 23, 2006, the NYSE filed Amendment No. 8 to the 
proposed rule change.\9\ This order approves the proposed rule change, 
as amended, grants accelerated approval to Amendment Nos. 6 and 8 to 
the proposed rule change, and solicits comments from interested persons 
on Amendment Nos. 6 and 8.
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    \8\ See Partial Amendment dated January 20, 2006 (``Amendment 
No. 6'').
    \9\ See Partial Amendment dated February 23, 2006 (``Amendment 
No. 8''). The text of Amendment Nos. 6 and 8, and Exhibits 5A 
through 5K of Amendment No. 8, which set forth the text of the NYSE 
rules and the governing documents, as proposed to be amended, is 
available on the Commission's Web site (http://www.sec.gov/rules/sro.shtml
), at the Commission's Public Reference Room, at the NYSE, 

and on the NYSE's Web site (http://www.nyse.com).

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    After careful review, the Commission finds that the proposed rule 
change, as amended, is consistent with the requirements of the Act and 
the rules and regulations thereunder applicable to a national 
securities exchange.\10\ In particular, the Commission finds that the 
proposed rule change, as amended, is consistent with Section 6(b) of 
the Act,\11\ which, among other things, requires a national securities 
exchange to be so organized and have the capacity to be able to carry 
out the purposes of the Act and to enforce compliance by its members 
and persons associated with its members with the provisions of the Act, 
the rules and regulations thereunder, and the rules of the exchange, 
and 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. 
Section 6(b) of the Act \12\ also requires that the rules of the 
exchange provide for the equitable allocation of reasonable dues, fees, 
and other charges among its members and issuers and other persons using 
its facilities, be designed to promote just and equitable principles of 
trade, to remove impediments to and perfect the mechanism of a free and 
open market and a national market system, and, in general, to protect 
investors and the public interest.
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    \10\ In approving the proposed rule change, the Commission has 
considered its impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \11\ 15 U.S.C. 78f(b).
    \12\ Id.
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A. Accelerated Approval of Amendment Nos. 6 and 8

    The Commission also finds good cause for approving Amendment Nos. 6 
and 8 to the proposed rule change prior to the thirtieth day after 
publishing notice of Amendment Nos. 6 and 8 in the Federal Register 
pursuant to Section 19(b)(2) of the Act.\13\
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    \13\ 15 U.S.C. 78s(b)(2). Pursuant to Section 19(b)(2) of the 
Act, 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.
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    In Amendment No. 6, the NYSE made changes to the proposed Amended 
and Restated Bylaws of NYSE Regulation, Inc. (``NYSE Regulation'') 
(``NYSE Regulation Bylaws'') to (1) Reduce the number of NYSE Group, 
Inc. (``NYSE Group'') directors on the NYSE Regulation board from a 
majority to a minority and increase the number of directors not 
affiliated with NYSE Group to a majority, (2) reduce the number of 
members of the NYSE Regulation nominating and governance committee that 
are also directors of NYSE Group from a majority to a minority, and (3) 
specify that NYSE Regulation will have a compensation committee 
responsible for setting the compensation for NYSE Regulation employees 
and that such committee will have a majority of directors that are not 
also NYSE Group directors. In addition, in Amendment No. 6, the NYSE 
(1) Acknowledged that NYSE Group, New York Stock Exchange LLC, and NYSE 
Market, Inc. (``NYSE Market'') are responsible for referring possible 
rule violations to NYSE Regulation, (2) specified that there will be an 
explicit agreement among various of the NYSE Group entities to provide 
adequate funding for NYSE Regulation, and (3) represented that the NYSE 
has undertaken to work with NASD and securities firm representatives to 
eliminate inconsistent rules and duplicative examinations.
    The Commission believes that these changes will provide additional 
safeguards to help ensure the independence of NYSE Regulation from the 
market operations and commercial interests of the exchange. 
Furthermore, the changes proposed in Amendment No. 6 will help ensure 
adequate funding of NYSE Regulation, through an explicit agreement with 
NYSE Group and its subsidiaries. In addition, the ability of NYSE 
Regulation to effectively carry out its regulatory responsibilities 
will be enhanced by the explicit acknowledgement that NYSE Group, New 
York Stock Exchange LLC, and NYSE Market each will be responsible for 
referring possible rule violations to NYSE Regulation, consistent with 
the self-regulatory obligations of New York Stock Exchange LLC and NYSE 
Market. The Commission therefore believes that these provisions of 
Amendment No. 6, which are designed to further the ability of the New 
York Stock Exchange LLC and its subsidiaries to comply with their 
statutory obligations, are consistent with

[[Page 11253]]

the Act, and therefore finds good cause exists to accelerate approval 
of these proposed rule changes in Amendment No. 6, pursuant to Section 
19(b)(2) of the Act.\14\
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    \14\ 15 U.S.C. 78s(b)(2).
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    The NYSE also represented in Amendment No. 6 that it will work with 
NASD and securities firm representatives to eliminate inconsistent 
rules and duplicative examinations, and will use its best efforts to 
submit to the Commission, within one year, proposed rule changes 
reconciling inconsistent rules and a report setting forth those rules 
that have not been reconciled.
    Several commenters expressed concern about regulatory burdens in 
connection with the proposed new structure.\15\ In particular, although 
Nasdaq recognizes that the NYSE has undertaken to work with NASD to 
eliminate inconsistent rules and duplicative examinations, it believes 
the proposal does not go far enough.\16\ Nasdaq believes that the 
structure proposed by the NYSE is inherently problematic, and that the 
Commission should insist that the NYSE in this filing rationalize 
inconsistent and duplicative regulation.\17\ In addition, while the ICI 
strongly supports the NYSE's initiative to work with NASD, it urges the 
Commission to set forth a specific time frame during which 
recommendations by the NYSE and NASD will be developed.\18\ The SIA and 
TBMA also welcome the NYSE's undertaking, but believe that it falls far 
short of addressing the problem.\19\ While they do not wish to delay 
approval of the NYSE's proposal, they urge the Commission to ask the 
NYSE to formally commit to work with NASD with a goal of developing, 
within a set time frame (such as sixty to ninety days) of approval, 
recommendations and an implementation timetable for appropriate 
consolidation of the broker-dealer regulatory functions of the two 
self-regulatory organizations (``SROs'').\20\
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    \15\ See ICI Letter, Nasdaq February Letter, and SIA/TBMA 
Letter, supra note . See also Nasdaq Extension Letter, supra note 6.
    \16\ Nasdaq February Letter, supra note 6, at 7.
    \17\ Id. at 7-8.
    \18\ See ICI Letter, supra note 6, at 2-3.
    \19\ See SIA/TBMA Letter, supra note 6, at 5.
    \20\ Id. at 23.
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    The NASD believes that the NYSE's proposal will exacerbate the 
extent of duplicative regulation, and that even if the NYSE were to 
follow through on its undertaking to identify and reconcile 
inconsistencies in its and NASD's member rules, the harmonization of 
duplicative rules amounts to a treatment of some, but not all, of the 
symptoms of the larger problem.\21\ In addition, NASD believes that 
harmonization fails to resolve the conflicts of interest that arise 
when an SRO operates a for-profit exchange and regulates that 
exchange's participants.\22\ NASD urges the Commission to adopt a 
hybrid model of self-regulation to resolve these conflicts and 
eliminate duplication.\23\ The SIA and TBMA also believe that combining 
the duplicative functions of NASD and NYSE broker-dealer regulation 
into one entity could address business conflict and regulatory 
duplication concerns,\24\ and Nasdaq states that it believes a 
consolidated ``hybrid'' SRO is in the best interests of investor 
protection.\25\
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    \21\ See NASD Letter, supra note 6, at 2-4. For instance, NASD 
believes that it will not eliminate all duplicative costs of having 
two organizations, rather than one, write, administer, and enforce 
the rules.
    \22\ Id. at 1-2, 4.
    \23\ Id. NASD's proposed hybrid model would unify all regulation 
of broker-dealer interaction with the public under a single SRO. 
Regulation of exchange operations--promulgation and enforcement of 
trading rules, market surveillance and listing standards--would be 
left to the separate trading market SROs. Id. at 2.
    \24\ SIA/TBMA Letter, supra note 6, at 3.
    \25\ Nasdaq February Letter, supra note 6, at 7.
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    The Commission recognizes that the existence of multiple SROs can 
result in duplicative and conflicting SRO rules, rule interpretations, 
and inspection regimes, and result in redundant SRO regulatory staff 
and infrastructure across SROs.\26\ Congress and the Commission have 
taken steps to reduce regulatory duplication.\27\ The question of what 
further steps should be taken, if any, with respect to this issue is 
part of a larger Commission review of the self-regulatory structure of 
our markets.\28\ The NYSE cannot on its own eliminate inconsistent 
rules among SROs and duplicative examinations, and the Commission 
therefore believes eliminating such inconsistencies and duplication is 
beyond the scope of this proposed rule change. The Commission believes 
that the NYSE's representation to the Commission that it will work with 
NASD and securities firm representatives to eliminate inconsistent 
rules and duplicative examinations is encouraging. In furtherance of 
its commitment to work with other industry participants, the NYSE also 
has represented that it will use its best efforts, in cooperation with 
NASD, to submit to the Commission within one year proposed rule changes 
reconciling inconsistent rules and a report setting forth those rules 
that have not been reconciled.\29\ The Commission believes that this 
undertaking by the NYSE should help advance the effort to make 
compliance with SRO rules and the examination process more efficient 
and is consistent with the Act. The Commission also finds good cause to 
accelerate approval of this undertaking pursuant to Section 19(b)(2) of 
the Act.\30\ The Commission also believes that the issue of whether 
changes should be made with respect to the overall structure of our 
self-regulatory system is outside the scope of this proposed rule 
change and is best addressed in the context of the larger Commission 
review of the self-regulatory structure of our markets.\31\
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    \26\ See Securities Exchange Act Release No. 50700 (November 18, 
2004), 69 FR 71256 (December 8, 2004) (``Concept Release Concerning 
Self-Regulation''). The Concept Release Concerning Self-Regulation 
contains a discussion of ``Inefficiencies of Multiple SROs.''
    \27\ See, e.g., Concept Release Concerning Self-Regulation and 
Section 17(d) of the Act and Rules 17d-1 and 17d-2 thereunder, 15 
U.S.C. 78q and 17 CFR 240.17d-1 and 240.17d-2.
    \28\ See Concept Release Concerning Self-Regulation, supra note 
26.
    \29\ See Amendment No. 6, supra note 8.
    \30\ 15 U.S.C. 78s(b)(2).
    \31\ See Concept Release Concerning Self-Regulation, supra note 
26.
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    In Amendment No. 8 the NYSE stated that the proposed rule change, 
as amended, would not be operative until the date of the closing of the 
Merger (as defined below). In addition, the NYSE made certain 
clarifying, technical, non-material, and non-substantive changes to the 
governing documents of the various NYSE Group entities and the proposed 
rules of New York Stock Exchange LLC. These changes are clarifying, 
technical, non-material, or non-substantive in nature, and raise no new 
or novel issues.
    The NYSE also proposes in Amendment No. 8 to change the composition 
of the New York Stock Exchange LLC board to provide that a majority of 
the board will be directors of the NYSE Group (other than the CEO). The 
NYSE originally proposed that all of the NYSE Group directors (other 
than the CEO) would be on the New York Stock Exchange LLC board. In 
addition, although the NYSE Group board will have the ability to remove 
some of the directors on the New York Stock Exchange LLC board, with or 
without cause, the NYSE proposes in Amendment No. 8 to limit NYSE Group 
to removing directors on the New York Stock Exchange LLC board that are 
selected by the members only for cause. Further, the NYSE proposes to 
eliminate the ability of New York Stock Exchange LLC to remove without 
cause the directors on the NYSE Market board selected by members and 
Non-Affiliated Regulation Directors (as defined

[[Page 11254]]

below) \32\ on the NYSE Regulation board. These changes will help to 
strengthen the independence of the exchange's regulatory functions from 
its commercial interests.
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    \32\ See infra note 86 and accompanying text.
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    Given the practical necessities of providing time to allow members 
to participate in the process for the selection of directors following 
the closing of the Merger, the NYSE in Amendment No. 8 proposes 
transitional boards of directors for New York Stock Exchange LLC, NYSE 
Market, and NYSE Regulation until no later than the first annual 
meetings of New York Stock Exchange LLC, NYSE Market, and NYSE 
Regulation, which are expected to occur in June 2006.\33\
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    \33\ To facilitate the interim board structure, Amendment No. 8 
also eliminates the set number of directors for the initial boards 
of NYSE Market and NYSE Regulation. See Amendment No. 8, supra note 
9.
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    The Commission believes that the changes proposed in Amendment No. 
8 are consistent with the Act and therefore finds good cause to 
accelerate approval of Amendment No. 8 to the proposed rule change, 
pursuant to Section 19(b)(2) of the Act.\34\
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    \34\ 15 U.S.C. 78s(b)(2).
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B. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment Nos. 6 and 8, including whether 
Amendment Nos. 6 and 8 are 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-NYSE-2005-77 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NYSE-2005-77. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml
). Copies of the submission, all subsequent amendments, all 

written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for inspection and 
copying in the Commission's Public Reference Room. Copies of such 
filing also will be available for inspection and copying at the 
principal office of the NYSE. 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 
Amendment Nos. 6 and 8 of File Number SR-NYSE-2005-77 and should be 
submitted on or before March 27, 2006.
    The Commission received several requests to extend the comment 
period for this proposed rule change, citing the length and complexity 
of the proposed rule change and the critical policy issues raised by 
the proposed rule change.\35\ The proposed rule change was publicly 
available when originally filed on November 3, 2005, and Amendment Nos. 
1, 3, and 5 were publicly available when filed by the NYSE on December 
1, 12, and 21, 2005, respectively.\36\ In addition, during this time 
period, the proposed rule change, as amended, was posted on the NYSE 
Web site.\37\ On January 12, 2005, the proposed rule change, as amended 
by Amendment Nos. 1, 2, 3, 4, and 5, was published in the Federal 
Register, for a three week comment period. The Commission believes that 
the public has had sufficient time to review the substance of the 
NYSE's proposed rule change and provide the Commission with comments.
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    \35\ See ICI Letter, Nasdaq Extension Letter, Nasdaq February 
Letter, SIA Extension Letter, and TBMA Letter, supra note 6. One 
commenter also requested that the Commission hold a public hearing 
on the proposed rule change. See IBAC February Letter, supra note 6, 
at 9.
    \36\ Amendment Nos. 2, 4, and 7 were withdrawn by the NYSE.
    \37\ See 17 CFR 240.19b-4(l), which requires that an SRO post a 
proposed rule change and any amendments thereto on the SRO's Web 
site within two days after the filing of the proposed rule change, 
and any amendments thereto.
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II. Discussion

    The NYSE and Archipelago entered into an agreement (``Merger 
Agreement'') to effect a merger (``Merger''). Following the Merger, the 
businesses of the NYSE and Archipelago will be held under a single, 
publicly traded holding company, NYSE Group. The NYSE's current 
businesses and assets will be held in three separate entities 
affiliated with NYSE Group--New York Stock Exchange LLC, NYSE Market, 
and NYSE Regulation. NYSE Market and NYSE Regulation will carry out 
their respective responsibilities pursuant to a delegation agreement 
with New York Stock Exchange LLC (``NYSE Delegation Agreement''). PCX 
Holdings, Inc. (``PCX Holdings'') will remain a wholly owned subsidiary 
of Archipelago. The Pacific Exchange, Inc. (``Pacific Exchange'') will 
remain a wholly owned subsidiary of PCX Holdings. Archipelago also will 
continue to own Archipelago Exchange, L.L.C., the equities trading 
facility of the Pacific Exchange (``ArcaEx'').
    The Merger will have the effect of converting the NYSE from a New 
York not-for-profit entity into a for-profit entity and demutualizing 
the NYSE by separating equity ownership in the NYSE from trading 
privileges on the NYSE.
    Through the Merger, Archipelago will become a wholly owned 
subsidiary of NYSE Group. The governing documents of Archipelago will 
remain unchanged other than amendments required to permit NYSE Group to 
own all of the outstanding shares of Archipelago.\38\ The Merger will 
have no effect on the right of any party to trade securities on the 
trading facilities of the Pacific Exchange, including ArcaEx.
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    \38\ These amendments are the subject of a proposed rule change 
filed by the Pacific Exchange, which proposed rule change the 
Commission is approving today. See Securities Exchange Act Release 
Nos. 53077 (January 9, 2006), 71 FR 2095 (January 12, 2006) 
(notice), and 53383 (February 27, 2006) (approval order).
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    This proposed rule change, as amended, is necessary to effectuate 
the consummation of the Merger.\39\
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    \39\ One commenter states that its concern that the NYSE intends 
to phase out the auction market completely in the context of the 
NYSE's Hybrid proposal (see Securities Exchange Act Release No. 
51906 (June 22, 2005), 70 FR 37463 (June 29, 2005)) has grown since 
the announcement of the NYSE's proposed Merger. IBAC February 
Letter, supra note 6, at 13. The Commission notes that the NYSE has 
not proposed any substantive changes to its trading market structure 
or trading rules in this rule filing, and that any future changes to 
its trading market structure or its trading rules would need to be 
filed with the Commission pursuant to Section 19(b) of the Act.
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A. Corporate Reorganization

    In connection with the Merger, the NYSE proposes to reorganize so 
that the NYSE Group will be a for-profit, publicly traded stock 
corporation and the holding company for the businesses of the NYSE and 
Archipelago. NYSE Group will hold all of the equity interests in New 
York Stock Exchange

[[Page 11255]]

LLC and Archipelago. The current NYSE businesses and assets will be 
held in New York Stock Exchange LLC, NYSE Market, and NYSE Regulation.
    New York Stock Exchange LLC will be a direct, wholly owned 
subsidiary of NYSE Group \40\ and will be the successor to the 
registration of the NYSE as a national securities exchange.\41\ The 
NYSE represents that New York Stock Exchange LLC is not expected to 
hold any material assets other than all of the equity interests of NYSE 
Market and NYSE Regulation.
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    \40\ The New York Limited Liability Company Act, under which New 
York Stock Exchange LLC is organized, uses the term ``members'' to 
describe those that have rights, including a share of the profits 
and losses of the company, to receive distributions from the 
company, and the right to vote and participate in the management of 
the company. NYSE Group will be the sole ``member'' of New York 
Stock Exchange LLC within the meaning of the New York Limited 
Liability Company Act, but this term should not be confused with the 
concept of a member or member organization of New York Stock 
Exchange LLC under its rules and for purposes of Section 6 of the 
Act. To avoid confusion, NYSE Group will be referred to as the 
``sole owner'' of New York Stock Exchange LLC.
    \41\ In connection with the reorganization, the NYSE proposes to 
eliminate its Constitution and to include in the rules of New York 
Stock Exchange LLC relevant provisions of the NYSE Constitution.
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    After the Merger, there will be ``members'' and ``member 
organizations'' of the New York Stock Exchange LLC. However, such 
members or member organizations by virtue of their membership will not 
be equity owners of NYSE Group or any of its subsidiaries. 
Organizations that obtain licenses to trade on NYSE Market (``Trading 
Licenses'') will be member organizations.\42\ In addition, broker-
dealers that submit to the jurisdiction and rules of New York Stock 
Exchange LLC, without obtaining a Trading License and thus without 
having rights to directly access the trading facilities of NYSE Market, 
will be member organizations.
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    \42\ See infra notes 197 to 216 and accompanying text for a 
discussion of Trading Licenses.
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    NYSE Market will be a wholly owned subsidiary of New York Stock 
Exchange LLC. After the Merger, NYSE Market will hold all of the assets 
and liabilities currently held by the NYSE, other than the NYSE's 
registration as a national securities exchange and the assets and 
liabilities relating to regulatory functions. The market functions of 
New York Stock Exchange LLC will be delegated pursuant to the NYSE 
Delegation Agreement to NYSE Market, which will conduct the exchange 
business that is currently conducted by the NYSE and will issue Trading 
Licenses, which are described below.
    NYSE Regulation, a New York Type A not-for-profit corporation, will 
be a wholly owned subsidiary of New York Stock Exchange LLC. After the 
Merger, NYSE Regulation will hold all of the assets and liabilities 
related to the regulatory functions currently conducted by the NYSE. 
Pursuant to the NYSE Delegation Agreement, NYSE Regulation will perform 
the regulatory functions of New York Stock Exchange LLC. NYSE 
Regulation also will perform many of the regulatory functions of the 
Pacific Exchange pursuant to a regulatory services agreement.
1. NYSE Group
    Following the closing of the Merger, NYSE Group will be the sole 
owner of New York Stock Exchange LLC. Section 19(b) of the Act \43\ and 
Rule 19b-4 thereunder \44\ require an SRO to file proposed rule changes 
with the Commission. Although NYSE Group is not an SRO, certain 
provisions of its certificate of incorporation and bylaws are rules of 
an exchange \45\ if they are stated policies, practice, or 
interpretations, as defined in Rule 19b-4 of the Act,\46\ of the 
exchange, and must be filed with the Commission pursuant to Section 
19(b) of the Act \47\ and Rule 19b-4 thereunder.\48\ Accordingly, the 
NYSE has filed the proposed Amended and Restated Certificate of 
Incorporation of NYSE Group (``NYSE Group Certificate of 
Incorporation'') and the proposed Amended and Restated Bylaws of NYSE 
Group (``NYSE Group Bylaws'') with the Commission.
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    \43\ 15 U.S.C. 78s(b).
    \44\ 17 CFR 240.19b-4.
    \45\ See Section 3(a)(27) of the Act, 15 U.S.C. 78c(a)(27). If 
NYSE Group decides to change its Certificate of Incorporation or 
Bylaws, NYSE Group must submit such change to the board of directors 
of the New York Stock Exchange LLC, NYSE Market, NYSE Regulation, 
the Pacific Exchange, and PCX Equities, Inc. (``PCX Equities''), and 
if any such boards of directors determines that such amendment is 
required to be filed with or filed with and approved by the 
Commission pursuant to Section 19 of the Act and the rules 
thereunder, such change shall not be effective until filed with or 
filed with and approved by the Commission, as applicable. See 
proposed NYSE Group Certificate of Incorporation, Article XIII and 
NYSE Group Bylaws, Article VII, Section 7.9.
    \46\ 17 CFR 240.19b-4.
    \47\ 15 U.S.C. 78s(b).
    \48\ 17 CFR 240.19b-4.
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a. Board of Directors
    Because the directors of NYSE Group will also serve on the boards 
of New York Stock Exchange LLC, NYSE Market, and NYSE Regulation, the 
composition of, and selection process for, the NYSE Group's board of 
directors is described below. The NYSE Group board of directors will 
consist of a number of directors set by the NYSE Group board of 
directors, and may include its chief executive officer. The initial 
term of directors will end with the first annual meeting of 
shareholders held by NYSE Group. Thereafter, the directors will serve 
one-year terms.
    Except for the NYSE Group board immediately following the closing 
of the Merger, nominees to the NYSE Group board of directors will be 
recommended by the nominating and governance committee of the NYSE 
Group board of directors.\49\ The nominating and governance committee 
will consider shareholder and public investor recommendations for 
candidates for the NYSE Group board of directors. Directors will be 
elected by the NYSE Group shareholders at each annual meeting of 
shareholders.\50\ The NYSE represents that the vast majority of the 
NYSE Group board of directors immediately after the closing of the 
Merger will be the current NYSE board of directors.\51\
---------------------------------------------------------------------------

    \49\ Telephone conversation between James F. Duffy, Senior Vice-
President and Deputy General Counsel, NYSE, and Kim M. Allen, 
Special Counsel, Division of Market Regulation (``Division''), 
Commission, on February 15, 2006.
    \50\ See proposed NYSE Group Certificate of Incorporation, 
Article VI, Section 4.
    \51\ See Amendment No. 8, supra note 9.
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    Each member of the NYSE Group board of directors, other than the 
chief executive officer,\52\ must be independent from (i) NYSE Group 
and its subsidiaries, (ii) any member or member organization of New 
York Stock Exchange LLC or the Pacific Exchange,\53\ and (iii) any 
company whose securities are listed on New York Stock Exchange LLC or 
the Pacific Exchange. The independent nature of the NYSE Group board of 
directors is modeled on the current Commission-approved structure of 
the NYSE board of directors.\54\ The proposed independence policy of 
the NYSE Group board of directors is similar to the NYSE's current 
independence policy,\55\ but has been expanded to cover relationships 
with the Pacific Exchange and its affiliates, and the members and 
member

[[Page 11256]]

organizations and listed companies of the Pacific Exchange.
---------------------------------------------------------------------------

    \52\ The chairman of the board of directors may be the chief 
executive officer of NYSE Group. If the chairman is not the chief 
executive officer, then he or she must satisfy the board's 
independence criteria.
    \53\ This includes non-member broker-dealers that engage in 
business involving substantial direct contact with securities 
customers.
    \54\ See Securities Exchange Act Release No. 48946 (December 17, 
2003), 68 FR 74678 (December 24, 2003) (``NYSE 2003 Governance 
Approval Order'').
    \55\ See Securities Exchange Act Release No. 51217 (February 16, 
2005), 70 FR 9688 (February 28, 2005) (``NYSE Independence Policy 
Approval Order'').
---------------------------------------------------------------------------

    The NYSE Group board of directors may create one or more 
committees. It is expected that, upon completion of the Merger, the 
NYSE Group board of directors will have an audit committee, a human 
resource and compensation committee, and a nominating and governance 
committee. Committees of the NYSE Group board of directors will not 
include the chief executive officer and therefore will consist solely 
of directors meeting the independence requirements of NYSE Group. These 
committees also will perform relevant functions for New York Stock 
Exchange LLC, NYSE Market, and NYSE Regulation, as described below.
b. Voting and Ownership Limitations; Changes in Control of New York 
Stock Exchange LLC
    The proposed NYSE Group Certificate of Incorporation includes 
restrictions on the ability to vote and own shares of stock of NYSE 
Group. Under the proposed NYSE Group Certificate of Incorporation, no 
person (either alone or together with its related persons \56\) will be 
entitled to vote or cause the voting of shares of stock of NYSE Group 
representing in the aggregate more than 10% of the total number of 
votes entitled to be cast on any matter, and no person (either alone or 
together with its related persons) may acquire the ability to vote more 
than 10% of the aggregate number of votes being cast on any matter by 
virtue of agreements entered into with other persons not to vote shares 
of NYSE Group's outstanding capital stock. NYSE Group will disregard 
any such votes purported to be cast in excess of these limitations.\57\
---------------------------------------------------------------------------

    \56\ See proposed NYSE Group Certificate of Incorporation, 
Article V, Section 1(E) and note 12 of the Notice for the definition 
of ``related person.''
    \57\ See proposed NYSE Group Certificate of Incorporation, 
Article V, Section 1(A).
---------------------------------------------------------------------------

    In addition, no person (either alone or together with its related 
persons) may at any time beneficially own shares of stock of NYSE Group 
representing in the aggregate more than 20% of the then outstanding 
votes entitled to be cast on any matter.\58\ In the event that a 
person, either alone or together with its related persons, beneficially 
owns shares of stock of NYSE Group in excess of the 20% threshold, such 
person and its related persons will be obligated to sell, and NYSE 
Group will be obligated to purchase, to the extent that funds are 
legally available for such purchase, that number of shares necessary to 
reduce the ownership level of such person and its related persons to 
below the permitted threshold, after taking into account that such 
repurchased shares will become treasury shares and will no longer be 
deemed to be outstanding.\59\
---------------------------------------------------------------------------

    \58\ See proposed NYSE Group Certificate of Incorporation, 
Article V, Section 2(A).
    \59\ See proposed NYSE Group Certificate of Incorporation, 
Article V, Section 2(D).
---------------------------------------------------------------------------

    NYSE also has proposed to permit the NYSE Group board of directors 
to require any person and its related persons that the board reasonably 
believes to own beneficially an aggregate of five percent (5%) or more 
of the then outstanding shares of NYSE Group stock to provide NYSE 
Group with information regarding such ownership upon the board of 
directors' request.\60\ This requirement will allow NYSE Group to 
monitor potential changes in control to ensure that none of the limits 
are reached.
---------------------------------------------------------------------------

    \60\ See proposed NYSE Group Certificate of Incorporation, 
Article V, Section 4.
---------------------------------------------------------------------------

    The NYSE Group board of directors may waive the provisions 
regarding voting and ownership limits after making certain 
determinations, including that such person is not subject to any 
statutory disqualification as defined in Section 3(a)(39) \61\ of the 
Act.\62\ Any such waiver must be filed with and approved by the 
Commission under Section 19 \63\ of the Act.\64\ However, for so long 
as NYSE Group directly or indirectly controls New York Stock Exchange 
LLC or NYSE Market, the NYSE Group board of directors cannot waive the 
voting and ownership limits above the 20% threshold if such person or 
its related persons is a member or member organization of New York 
Stock Exchange LLC.\65\ In addition, for so long as NYSE Group directly 
or indirectly controls the Pacific Exchange, PCX Equities or any 
facility of the Pacific Exchange, the NYSE Group board of directors 
cannot waive the voting and ownership limits above the 20% threshold if 
such person or its related persons is an ETP Holder, OTP Holder or OTP 
Firm.\66\
    Members that trade on an exchange traditionally have 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.\67\ A 
member that is a controlling shareholder of an exchange might be 
tempted to exercise that controlling influence by directing the 
exchange to refrain from, or the exchange 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. In this regard, one commenter 
expressed concern regarding undue influence by certain NYSE members 
that own a large number of seats, and thus will own substantial equity 
interests in NYSE Group after the Merger, noting such members would 
have ``an influence on its board composition.'' \68\
    In addition, as proposed, New York Stock Exchange LLC will be a 
wholly owned subsidiary of NYSE Group. The Operating Agreement of New 
York Stock Exchange LLC identifies this ownership structure. Any 
changes to the Operating Agreement of New York Stock Exchange LLC, 
including any change in the provision that identifies NYSE Group as the 
sole owner, must be filed with and approved by the Commission pursuant 
to Section 19 of the Act.\69\ In addition, pursuant to the Operating 
Agreement of New York Stock Exchange LLC, NYSE Group may not transfer 
or assign its interest in New York Stock Exchange LLC, in whole or 
part, to any entity, unless such transfer or assignment is filed with 
and approved by the Commission under Section 19 of the Act.\70\ 
Further, NYSE Group may resign from New York Stock Exchange LLC only if 
an additional owner is admitted to New York Stock Exchange LLC. The 
resignation of NYSE Group and the admission of a replacement member (or 
admission of an additional member, without NYSE Group's resignation) 
must be filed with

[[Page 11257]]

and approved by the Commission under Section 19 of the Act.\71\
---------------------------------------------------------------------------

    \61\ 15 U.S.C. 78c(a)(39).
    \62\ See proposed NYSE Group Certificate of Incorporation, 
Article V, Sections 1(A) and 2(C).
    \63\ 15 U.S.C. 78s.
    \64\ See proposed NYSE Group Certificate of Incorporation, 
Article V, Sections 1(A) and 2(B).
    \65\ See proposed NYSE Group Certificate of Incorporation, 
Article V, Sections 1(A) and 2(C).
    \66\ Id. ETP Holder is defined in the PCX Equities rules of the 
Pacific Exchange. OTP Holder and OTP Firm are defined in the rules 
of the Pacific Exchange.
    \67\ See Securities Exchange Act Release Nos. 53128 (January 13, 
2006), 71 FR 3550 (January 23, 2006) (File No. 10-131); 51149 
(February 8, 2005), 70 FR 7531 (February 14, 2005) (SR-CHX-2004-26); 
49718 (May 17, 2004), 69 FR 29611 (May 24, 2004) (SR-PCX-2004-08); 
49098 (January 16, 2004), 69 FR 3974 (January 27, 2004) (SR-Phlx-
2003-73); and 49067 (January 13, 2004), 69 FR 2761 (January 20, 
2004) (SR-BSE-2003-19).
    \68\ IBAC February Letter, supra note, at 6. The commenter 
pointed to prior charges of regulatory favoritism by SROs (citing in 
part to a comment letter on the Concept Release Concerning Self-
Regulation). Id.
    \69\ 15 U.S.C. 78s.
    \70\ See proposed Operating Agreement of New York Stock Exchange 
LLC, Article III, Section 3.03.
    \71\ See proposed Operating Agreement of New York Stock Exchange 
LLC, Article III, Sections 3.04 and 3.05.
---------------------------------------------------------------------------

    The Commission finds the ownership and voting restrictions in the 
NYSE Group Certificate of Incorporation and the change in control 
provisions in the Operating Agreement of New York Stock Exchange LLC 
are consistent with the Act. These requirements should minimize the 
potential that a person could improperly interfere with or restrict the 
ability of the Commission, New York Stock Exchange LLC, or its 
subsidiaries to effectively carry out their regulatory oversight 
responsibilities under the Act.
2. New York Stock Exchange LLC and Its Subsidiaries
a. New York Stock Exchange LLC
    The New York Stock Exchange LLC board of directors will consist of 
a number of directors to be set by NYSE Group, as the sole owner of New 
York Stock Exchange LLC. All directors of New York Stock Exchange LLC 
must qualify as independent under the independence policy of the NYSE 
Group board of directors. A majority of the directors of New York Stock 
Exchange LLC will be directors of the NYSE Group (other than its chief 
executive officer), and twenty percent (20%), and not less than two, of 
the directors will be chosen by the members of New York Stock Exchange 
LLC (``LLC Fair Representation Directors'').\72\ The New York Stock 
Exchange LLC board of directors also may include other directors that 
are not NYSE Group directors (``Non-Affiliated LLC Directors'').
---------------------------------------------------------------------------

    \72\ The NYSE amended the New York Stock Exchange LLC board 
composition in Amendment No. 8 to provide that a majority of the New 
York Stock Exchange LLC directors will be NYSE Group directors 
(other than the chief executive officer). The NYSE had previously 
proposed that all NYSE Group directors (other than the chief 
executive officer) would be on the New York Stock Exchange LLC 
board.
---------------------------------------------------------------------------

    NYSE Group will be obligated to appoint or elect as LLC Fair 
Representation Directors those candidates who are recommended jointly 
by the NYSE Market Director Candidate Recommendation Committee (``NYSE 
Market DCRC'') \73\ and the NYSE Regulation Director Candidate 
Recommendation Committee (``NYSE Regulation DCRC''),\74\ including 
those candidates who emerge from the petition process of New York Stock 
Exchange LLC members (as described below).\75\ If the New York Stock 
Exchange LLC board of directors includes Non-Affiliated LLC Directors, 
the nominating and governance committee of the NYSE Group board of 
directors will nominate candidates for such positions, and NYSE Group 
will appoint or elect such candidates as directors.
---------------------------------------------------------------------------

    \73\ On an annual basis, the NYSE Market board of directors will 
appoint a NYSE Market DCRC comprised of representatives of upstairs 
firms, specialists, and floor brokers.
    \74\ On an annual basis, the NYSE Regulation board of directors 
will appoint a NYSE Regulation DCRC comprised of representatives of 
upstairs firms, specialists, and floor brokers.
    \75\ See infra notes 98 to 100 and accompanying text. One 
commenter believes that the fair representation candidate 
recommendation process is extremely complex and confusing, 
questioning in particular how this process will work in practice if 
the two DCRC committees cannot agree on joint recommendations. SIA/
TBMA Letter, supra note 6, at 18. The NYSE believes that, as a 
practical matter, there will be no conflicts between the two 
committees because they will act as one committee in making 
recommendations for LLC Fair Representation Directors and it is 
expected that the two committees will be comprised of the same 
persons. See NYSE Response to Comments, supra note 7, at 14.
---------------------------------------------------------------------------

    Immediately following the closing of the Merger, however, the New 
York Stock Exchange LLC board of directors will not include any LLC 
Fair Representation Directors because the process for choosing these 
directors will not have taken place. Accordingly, initially, it is 
expected that the New York Stock Exchange LLC board of directors will 
be comprised solely of NYSE Group directors.\76\ As noted above, the 
vast majority of the initial NYSE Group directors will be the current 
NYSE board. These directors were elected by current NYSE members 
following a nomination process that permits the industry members of the 
NYSE Board of Executives to recommend 20% of the nominees and members 
to petition for alternate nominees. No New York Stock Exchange LLC 
members participated in the selection of directors for the initial 
board because New York Stock Exchange LLC does not yet have members. In 
light of these circumstances, and the NYSE's representation that the 
LLC Fair Representation Directors will be chosen by members and elected 
by NYSE Group as promptly as possible following the Merger,\77\ the 
Commission believes that the proposed composition of the initial New 
York Stock Exchange LLC board of directors is consistent with the Act.
---------------------------------------------------------------------------

    \76\ Although the size of the New York Stock Exchange LLC board 
will be fixed from time to time by NYSE Group, the NYSE represents 
that the board of directors of New York Stock Exchange LLC is not 
expected to have more than ten directors. See Amendment No. 8, supra 
note 9.
    \77\ The NYSE represented that the individuals who will serve on 
the initial NYSE Market DCRC and NYSE Regulation DCRC will be 
identified and meet informally prior to the closing of the Merger, 
so that promptly thereafter these committees may be formally 
constituted and recommend candidates for LLC Fair Representation 
Directors. Following the petition process, infra notes 98 to 100 and 
accompanying text, NYSE Group will promptly elect to the board 
candidates for LLC Fair Representation Directors chosen by members. 
Such election will occur no later than (and may occur prior to) the 
annual meeting of New York Stock Exchange LLC, which is expected to 
be held in June 2006. These directors will serve until the New York 
Stock Exchange LLC annual meeting in 2007. See Amendment No. 8, 
supra note 9.
---------------------------------------------------------------------------

    The Operating Agreement of New York Stock Exchange LLC permits the 
board of directors to delegate its powers to a committee appointed by 
the board which may consist partly or entirely of non-directors. The 
NYSE stated, however, that the board of directors of New York Stock 
Exchange LLC is not expected to have its own committees and that any 
necessary functions with respect to audit, compensation, nomination, 
and governance will be performed by the relevant committees of the NYSE 
Group board of directors.
b. NYSE Market
    The NYSE Market board of directors will consist of a number of 
directors to be set by New York Stock Exchange LLC, as the sole equity 
owner of NYSE Market.\78\ In addition, the board of directors will be 
composed as follows:
---------------------------------------------------------------------------

    \78\ In Amendment No. 8, the NYSE proposes to eliminate the set 
initial number of directors. See Amendment No. 8, supra note 9.
---------------------------------------------------------------------------

     The chief executive officer of NYSE Group will be a 
director of NYSE Market;
     A majority of the directors of NYSE Market will be NYSE 
Group directors (excepting the chief executive officer); and
     Twenty percent (20%), and not less than two, of the NYSE 
Market directors will be directors chosen by the members of New York 
Stock Exchange LLC (``Market Fair Representation Directors'').

The NYSE Market board of directors also may include other directors 
that are not NYSE Group directors (``Non-Affiliated Market 
Directors''). The Market Fair Representation Directors and the Non-
Affiliated Market Directors do not need to be independent, and must 
meet all status or constituent affiliation qualifications prescribed by 
any NYSE Market rule or policy filed with the Commission.\79\
---------------------------------------------------------------------------

    \79\ The SIA and TBMA in their comment letter questioned whether 
``status or constituent affiliation qualifications'' refers to 
qualifications that applied to member directors prior to 2003. SIA/
TBMA Letter, supra note 6, at note 24. The NYSE notes that the 
reference refers to qualifications that may be filed with the 
Commission in the future, and that it does not have any proposed 
qualifications filed with the Commission at this time. NYSE Response 
to Comments, supra note 7, at note 13 and telephone conversation 
between James F. Duffy, Senior Vice-President and Deputy General 
Counsel, NYSE, et al., and Heather A. Seidel, Senior Special 
Counsel, Commission, Division, et al., on February 10, 2006.

---------------------------------------------------------------------------

[[Page 11258]]

    New York Stock Exchange LLC will be obligated to appoint or elect 
as Market Fair Representation Directors, those candidates who are 
recommended by the NYSE Market DCRC, including those who emerge from 
the petition process of New York Stock Exchange LLC members (as 
described below).\80\ If the NYSE Market board of directors includes 
Non-Affiliated Market Directors, the nominating and governance 
committee of the NYSE Group board of directors will nominate candidates 
for such positions, and New York Stock Exchange LLC will appoint or 
elect such candidates as directors.
---------------------------------------------------------------------------

    \80\ See infra notes 98 to 100 and accompanying text.
---------------------------------------------------------------------------

    Immediately following the closing of the Merger, however, the 
process for choosing Market Fair Representation Directors will not have 
taken place, and the NYSE Market board of directors will not include 
any Market Fair Representation Directors. Accordingly, immediately 
following the closing of the Merger, the NYSE Market board of directors 
will be comprised of the chief executive officer of NYSE Group and NYSE 
Group directors, and is expected to have only one Non-Affiliated Market 
Director.\81\ As noted above, the vast majority of the initial NYSE 
Group directors will be the current NYSE board. These directors were 
elected by current NYSE members following a nomination process that 
permits the industry members of the NYSE Board of Executives to 
recommend 20% of the nominees and members to petition for alternate 
nominees. No New York Stock Exchange LLC members participated in the 
selection of directors for the initial board because New York Stock 
Exchange LLC does not yet have members. In light of these 
circumstances, and the NYSE's representation that the Market Fair 
Representation Directors will be chosen by members and elected by New 
York Stock Exchange LLC as promptly as possible following the 
Merger,\82\ the Commission believes that the proposed composition of 
the initial NYSE Market board of directors is consistent with the Act.
---------------------------------------------------------------------------

    \81\ See Amendment No. 8, supra note 9. Although the size of 
NYSE Market board will be fixed from time to time by New York Stock 
Exchange LLC, the NYSE represents that the board of directors of 
NYSE Market is not expected to have more than ten directors. See 
Amendment No. 8, supra note 9.
    \82\ The NYSE represented that the individuals who will serve on 
the initial NYSE Market DCRC will be identified and meet informally 
prior to the closing of the Merger, so that promptly thereafter this 
committee may be formally constituted and recommend candidates for 
Market Fair Representation Directors. Following the petition 
process, infra notes 98 to 100 and accompanying text, New York Stock 
Exchange LLC will promptly elect to the board of NYSE Market 
candidates for Market Fair Representation Directors chosen by 
members. Such election will occur no later than (and may occur prior 
to) the annual meeting of NYSE Market, which is expected to be held 
in June 2006. These directors will serve until the annual meeting of 
NYSE Market in 2007. See Amendment No. 8, supra note 9.
---------------------------------------------------------------------------

    The NYSE Market board of directors may create one or more 
committees comprised of NYSE Market directors. The NYSE has represented 
that it expects that the committees of the NYSE Group board of 
directors will perform the committee functions relating to audit, 
governance, nomination, and compensation. The NYSE Market board of 
directors also may create committees comprised in whole or in part of 
individuals who are not directors.
    The NYSE has represented that upon completion of the Merger, the 
NYSE Market board of directors will establish one or more advisory 
committees to facilitate communication and provide input to the board 
of directors, management, and staff of NYSE Market and its affiliated 
entities on policies, programs, products, and services. The NYSE Market 
board of directors will create a Market Performance Committee comprised 
of representatives of member organizations. The Market Performance 
Committee will act in an advisory capacity regarding trading rules and 
other matters to be specified in its charter.\83\
---------------------------------------------------------------------------

    \83\ See proposed NYSE Rule 20(b). In connection with 
establishing these advisory committees, the NYSE proposes to 
eliminate references to the Board of Executives from the rules of 
the exchange.
---------------------------------------------------------------------------

    The officers of NYSE Market will manage the business and affairs of 
NYSE Market, subject to the oversight by the NYSE Market board of 
directors. The chief executive officer of NYSE Group will serve as the 
chief executive officer of NYSE Market (and as a director of NYSE 
Market).
c. NYSE Regulation
    The NYSE Regulation board of directors will consist of a number of 
directors to be set by New York Stock Exchange LLC, as the sole equity 
owner of NYSE Regulation.\84\ The chief executive officer of NYSE 
Regulation will be a director of NYSE Regulation \85\ and a majority of 
the directors of NYSE Regulation will be persons who are not NYSE Group 
directors, but who otherwise qualify as independent under the 
independence policy of the NYSE Group board of directors (``Non-
Affiliated Regulation Directors'').\86\ Except for the NYSE Regulation 
board of directors immediately following the closing of the Merger, 
20%, and not less than two, of the NYSE Regulation directors will be 
chosen by the members of New York Stock Exchange LLC (``Regulation Fair 
Representation Directors'').\87\ The remaining NYSE Regulation 
directors will be NYSE Group directors (other than its chief executive 
officer).
---------------------------------------------------------------------------

    \84\ In Amendment No. 8, the NYSE proposes to eliminate the set 
initial number of directors. See Amendment No. 8, supra note 9.
    \85\ See infra note 89 and accompanying text.
    \86\ See Amendment No. 6, supra note 8.
    \87\ The Fair Representation Directors will compose part of the 
majority that are Non-Affiliated Regulation Directors.
---------------------------------------------------------------------------

    New York Stock Exchange LLC will be obligated to appoint or elect 
as Regulation Fair Representation Directors those candidates who are 
recommended by the NYSE Regulation DCRC, including those candidates who 
emerge from the petition process of New York Stock Exchange LLC members 
(as described below).\88\ Non-Affiliated Regulation Directors will be 
nominated by the nominating and governance committee of NYSE 
Regulation. New York Stock Exchange LLC will appoint or elect such 
nominees to the board of directors of NYSE Regulation.
---------------------------------------------------------------------------

    \88\ See infra notes 98 to 100 and accompanying text.
---------------------------------------------------------------------------

    Immediately following the closing of the Merger, the NYSE 
Regulation board of directors will be comprised of three Non-Affiliated 
Directors and two NYSE Group directors. There will be no Regulation 
Fair Representation Directors because, as discussed above, the process 
for choosing such directors will not yet have taken place. The board of 
directors will, however, have a majority of Non-Affiliated Regulation 
Directors. The chief executive officer of NYSE Regulation will not 
become a member of the board of directors of NYSE Regulation until the 
Regulation Fair Representation Directors are elected to that board.\89\
---------------------------------------------------------------------------

    \89\ See Amendment No. 8, supra note 9.
---------------------------------------------------------------------------

    Prior to the closing of the Merger, the NYSE's current nominating 
and governance committee will select directors to serve as the three 
Non-Affiliated Directors on the initial NYSE Regulation board.\90\ The 
directors on NYSE's nominating and governance committee were elected by 
current NYSE members following a nomination

[[Page 11259]]

process that permits the industry members of the NYSE Board of 
Executives to recommend 20% of the nominees and members to petition for 
alternate nominees. No New York Stock Exchange LLC members participated 
in the selection of directors for the initial board because it does not 
yet have members. Moreover, NYSE Regulation does not yet have a 
nominating and governance committee to nominate candidates to serve as 
Non-Affiliated Directors. Prior to the first annual meeting of NYSE 
Regulation, the NYSE Regulation nominating and governance committee 
will be required, pursuant to the proposed NYSE Regulation Bylaws, to 
nominate Non-Affiliated Directors to be elected at the first annual 
meeting, which is expected to occur no later than June 2006. In light 
of these circumstances, and the NYSE's representation that the 
Regulation Fair Representation Directors will be chosen by members and 
elected by New York Stock Exchange LLC as promptly as possible 
following the Merger,\91\ the Commission believes that the proposed 
composition of the initial NYSE Regulation board of directors is 
consistent with the Act.
---------------------------------------------------------------------------

    \90\ The current NYSE nominating and governance committee is 
comprised of all of the independent directors on the current NYSE 
board. The current NYSE board is composed of only independent 
directors, plus the chief executive officer of the NYSE.
    \91\ The NYSE represented that the individuals who will serve on 
the initial NYSE Regulation DCRC will be identified and meet 
informally prior to the closing of the Merger, so that promptly 
thereafter this committee may be formally constituted and recommend 
candidates for Regulation Fair Representation Directors. Following 
the petition process, infra notes 98 to 100 and accompanying text, 
New York Stock Exchange LLC will promptly elect to the board 
candidates for Regulation Fair Representation Directors chosen by 
members. Such election will occur no later than (and may occur prior 
to) the annual meeting of NYSE Regulation, which is expected to be 
held in June 2006. These directors will serve until the annual 
meeting of NYSE Regulation in 2007. See Amendment No. 8, supra note 
9.
---------------------------------------------------------------------------

    The NYSE Regulation board of directors may create one or more 
committees comprised of NYSE Regulation directors. It will create a 
nominating and governance committee and a compensation committee, each 
of which will be comprised of a majority of Non-Affiliated Regulation 
Directors. The compensation committee will be responsible for setting 
the compensation for NYSE Regulation employees.\92\ The nominating and 
governance committee will bear responsibility for nominating Non-
Affiliated Regulation Director candidates. The NYSE has represented 
that it is expected that the audit committee of the NYSE Group board of 
directors will perform the board committee functions relating to audit.
---------------------------------------------------------------------------

    \92\ See Amendment No. 6, supra note 8.
---------------------------------------------------------------------------

    The NYSE Regulation board of directors also may create committees 
comprised in whole or in part of individuals who are not directors. The 
NYSE Regulation board of directors will appoint a committee that, among 
other things, will review disciplinary decisions on behalf of the NYSE 
Regulation board of directors (``Committee for Review'').\93\ This 
committee will be comprised of directors of NYSE Regulation that 
satisfy the independence requirements (thus, any NYSE Regulation 
director, other than the chief executive officer), as well as persons 
who are not directors. A majority of the members of the Committee for 
Review voting on a matter must be directors of NYSE Regulation. Among 
the persons on the Committee for Review who are not directors, will be 
included representatives of member organizations that engage in a 
business involving substantial direct contact with securities customers 
(upstairs firms), specialists, and floor brokers.\94\ In addition, the 
NYSE Regulation board of directors will create a Regulatory Advisory 
Committee, which will include representatives of member organizations. 
The Regulatory Advisory Committee will act in an advisory capacity 
regarding disciplinary matters and regulatory rules other than trading 
rules.\95\
---------------------------------------------------------------------------

    \93\ This committee will be the successor committee to the 
current regulation, enforcement, and listing standards committee 
(``RELS Committee''). See infra note 192 and accompanying text.
    \94\ See proposed NYSE Regulation Bylaws, Article III, Section 
5.
    \95\ See proposed NYSE Rule 20(b).
---------------------------------------------------------------------------

    The NYSE has represented that upon completion of the Merger, the 
NYSE Regulation board of directors is expected to establish one or more 
additional advisory committees to facilitate communication and provide 
input to the board of directors, management, and staff of NYSE 
Regulation and its affiliated entities on policies, programs, 
regulatory aspects of products, and services.
d. Fair Representation of New York Stock Exchange LLC Members
    Section 6(b)(3) of the Act \96\ requires that the rules of an 
exchange assure fair representation of its members in the selection of 
its directors and administration of its affairs. This requirement helps 
to ensure that members have a voice in the self-regulatory authority 
and that the exchange is administered in a way that is equitable to all 
those who trade on its market or through its facilities. As discussed 
below, the Commission believes that the NYSE's proposed requirement 
that 20% of the directors of the boards of directors of New York Stock 
Exchange LLC, NYSE Market, and NYSE Regulation be chosen by members and 
the means by which they will be chosen satisfies the fair 
representation of members in the selection of directors and the 
administration of the exchange consistent with the requirements in 
Section 6(b)(3) of the Act.\97\
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    \96\ 15 U.S.C. 78f(b)(3).
    \97\ Id. The Commission does not believe that there is only one 
method to satisfy the fair representation requirements of Section 
6(b)(3) of the Act, and reviews each SRO proposal on its own terms 
to determine if it is consistent with the Act.
---------------------------------------------------------------------------

    The DCRC committees, composed of member representatives, will 
nominate candidates to be LLC Fair Representation Directors, Market 
Fair Representation Directors, and Regulation Fair Representation 
Directors. In addition, members will be able to nominate directly 
candidates to be Fair Representation Directors through a petition 
process.
    Specifically, member organizations may nominate candidates by 
submitting a petition signed by at least ten percent (10%) of the 
eligible signatures.\98\ No member organization, together with its 
affiliates, may account for more than fifty percent (50%) of the 
signatures endorsing a particular candidate.\99\ If the number of 
candidates after the petition process is greater than 20% (or two) of 
the total number of members on the board of directors of New York Stock 
Exchange LLC, NYSE Market, and NYSE Regulation, as applicable, then the 
member organizations will vote on the candidates.\100\ No member 
organization, either alone or together with its affiliates, may account 
for more than 20% of the votes cast for a particular candidate. The 
candidates receiving the

[[Page 11260]]

highest number of votes will become the Fair Representation Directors.
---------------------------------------------------------------------------

    \98\ For a candidate for the New York Stock Exchange LLC board 
of directors or the NYSE Regulation board of directors, each member 
organization is entitled to one signature for each Trading License 
owned by it, and each member organization that does not own a 
Trading License is entitled to one signature. For a candidate for 
the NYSE Market board of directors, each member organization is 
entitled to one signature for each Trading License owned by it, and 
a member organization that does not own a Trading License is not 
entitled to sign a petition.
    \99\ See proposed Operating Agreement of New York Stock Exchange 
LLC, Article II, Section 2.03(iv), proposed Bylaws of NYSE Market 
(``NYSE Market Bylaws''), Article III, Section 1(C), and proposed 
NYSE Regulation Bylaws, Article III, Section 1(C).
    \100\ For a candidate for the New York Stock Exchange LLC board 
of directors or the NYSE Regulation board of directors, each member 
organization is entitled to one vote for each Trading License owned 
by it, and each member organization that does not own a Trading 
License is entitled to one vote. For a candidate for the NYSE Market 
board of directors, each member organization is entitled to one vote 
for each Trading License owned by it, and a member organization that 
does not own a Trading License is not entitled to vote.
---------------------------------------------------------------------------

    The Commission believes that members' participation on various 
committees, including the Market Performance Committee of the NYSE 
Market, and the Regulatory Advisory Committee and Committee for Review 
of NYSE Regulation, further provides for the fair representation of 
members in the administration of the affairs of the exchange, including 
rulemaking and the disciplinary process, consistent with Section 
6(b)(3) of the Act.\101\
---------------------------------------------------------------------------

    \101\ 15 U.S.C. 78f(b)(3). Each of the Market Performance and 
Regulatory Advisory Committees will include representatives of 
member organizations that do business on the floor and those that do 
not. The Market Performance Committee shall act in an advisory 
capacity regarding trading rules and other matters within its 
charter, and the Regulatory Advisory Committee shall act in an 
advisory capacity regarding disciplinary matters and regulatory 
rules other than trading rules. See proposed NYSE Rule 20(b). The 
Committee for Review, which will hear disciplinary appeals on behalf 
of the NYSE Regulation board of directors, will be composed of NYSE 
Regulation directors and member representatives. See NYSE Regulation 
Bylaws, Article III, Section 5. See also infra note and accompanying 
text.
---------------------------------------------------------------------------

    In their joint comment letter on the proposed rule change, the SIA 
and TBMA state that the requirement that all New York Stock Exchange 
LLC and NYSE Regulation directors, including the 20% selected by the 
membership, be independent, as well as the way that ``independence'' is 
defined, does not comport with the ``fair representation'' 
requirement.\102\ They also do not believe that such a structure is 
desirable from a policy perspective because it will exclude nearly all 
persons with significant and recent industry experience, which will 
result in inferior regulatory oversight.\103\ The SIA and TBMA further 
believe that the need for direct member representation on these boards 
is heightened in a for-profit structure, particularly when directors of 
the for-profit parent, NYSE Group, are heavily represented on, or 
dominate, the exchange and regulatory boards.\104\ They are concerned 
about conflicts of interest between the exchange's commercial interests 
and its regulatory responsibilities, particularly its regulation of 
members that are its competitors, and believe that such direct member 
representation is necessary to act as a ``check against the [e]xchange 
misusing its regulatory power to gain advantage over its 
competitors.''\105\ Another commenter also questions whether the 
proposed structure meets the fair representation requirements of the 
Act, noting that NYSE Group's board lacks any industry input and that 
other boards or committees may have only token participation.\106\
---------------------------------------------------------------------------

    \102\ SIA/TBMA Letter, supra note 6, at 11.
    \103\ Id. at 14-16.
    \104\ The SIA and TBMA note that other demutualized SROs allow 
for direct member representation on their boards of directors. Id. 
at 12-13. The Commission does not believe that there is only one 
method to satisfy the fair representation requirements of Section 
6(b)(3) of the Act, and reviews each SRO proposal on its own terms 
to determine if it is consistent with the Act.
    \105\ Id. at 11-12. See also infra discussion in Section II.C. 
on the independence of the exchange's regulatory function.
    The SIA and TBMA, noting that the question of whether self-
regulation remains a viable concept was posed by the Commission in 
the Concept Release Concerning Self-Regulation, believe that 
approval of the NYSE's proposal would be ``tantamount'' to the 
Commission concluding that members should not exercise a meaningful 
voice in regulating their business activities through existing SROs. 
Id. at 12. The Commission notes that its responsibility is to 
determine whether the NYSE's instant proposal is consistent with the 
Act, and that if the Commission were in the future to take action on 
the issue of whether the self-regulatory structure of the U.S. 
securities markets remains a viable structure, such action would 
impact all SROs.
    \106\ Nasdaq February Letter, supra note 6, at 6-7. The 
Commission notes that it has not required the board of directors of 
a holding company of an exchange to satisfy the requirements of 
Section 6(b)(3) of the Act. See, e.g., Securities Exchange Act 
Release No. 53128 (January 13, 2006), 71 FR 3550 (January 23, 2006).
---------------------------------------------------------------------------

    The Commission believes that the fair representation requirement 
would not prohibit exchanges and associations from having boards of 
directors composed solely of independent directors, and that if a board 
of directors is composed wholly of independent directors, the candidate 
or candidates selected by members would have to be independent. The 
Commission also notes that it previously approved the NYSE's fully 
independent board, finding that such a board could be consistent with 
the Act and the fair representation and issuer and investor 
representation requirements.\107\ The Commission recognizes the SIA's 
and TBMA's concern regarding potential heightened conflicts in a for-
profit entity between an exchange's commercial interests and its 
regulation of members that are competitors. It would be a violation of 
the Act if the NYSE Regulation board were to advance the commercial 
interests of the NYSE Group at the expense of fulfilling New York Stock 
Exchange LLC's regulatory obligations.\108\ The Commission finds that 
overall the composition of and selection process for the NYSE 
Regulation board of directors, as well as the New York Stock Exchange 
LLC and NYSE Market boards of directors, are consistent with Section 
6(b)(3) of the Act,\109\ and would permit the exchange to carry out its 
obligations under Section 6(b)(1) of the Act \110\ to be so organized 
and have the capacity to be able to carry out the purposes of the Act 
and to enforce compliance by its members and persons associated with 
its members with the provisions of the Act, the rules and regulations 
thereunder, and the rules of the exchange.\111\
---------------------------------------------------------------------------

    \107\ See NYSE 2003 Governance Approval Order, supra note 54. 
The Commission approved the current independence policy of the NYSE 
on February 16, 2005. See NYSE Independence Policy Approval Order, 
supra note 55.
    \108\ See, e.g., Report pursuant to Section 21(a) of the 
Securities Exchange Act of 1934 Regarding the NASD and the Nasdaq 
Market, August 8, 1996, available at the Commission's Web site 
(http://www.sec.gov/litigation/investreport/nasdaq21a.htm) (``1996 

21(a) Report''), and Securities Exchange Act Release No. 51524 
(April 12, 2005), available at the Commission's Web site (http://www.sec.gov/litigation/admin/34-51524.pdf
) (``2005 NYSE 

Administrative Cease-and-Desist Proceeding'').
    \109\ 15 U.S.C. 78f(b)(3).
    \110\ 15 U.S.C. 78f(b)(1).
    \111\ One commenter recommended that to ensure that the views of 
the NYSE floor brokers will be heard and their interests protected, 
the governing documents of NYSE Group, NYSE Market, and NYSE 
Regulation should provide that their respective boards of directors 
at all times include at least one director that is currently 
affiliated with an active independent floor brokerage business on 
the NYSE floor. IBAC February Letter, supra note 6, at 22. The 
Commission notes that each of the DCRC committees of NYSE Market and 
NYSE Regulation, which are responsible for recommending the ``fair 
representation'' candidates for the boards of New York Stock 
Exchange LLC, NYSE Market, and NYSE Regulation, must have at least 
two individuals each of whom is associated with a member 
organization and spends a majority of his time on the trading floor 
of NYSE Market and has as a substantial part of his business the 
execution of transactions on the floor for other than his own 
account or the account of his member organization. See NYSE Market 
Bylaws, Article III, Section 5, and NYSE Regulation Bylaws, Article 
III, Section 5. In addition, any person that holds a Trading 
License, including a floor broker, will be able to utilize the 
petition process as described in this section.
---------------------------------------------------------------------------

    The SIA and TBMA also believe that NYSE's regulatory structure 
should ensure meaningful member representation in the rulemaking and 
funding processes of New York Stock Exchange LLC and NYSE Regulation, 
and that representation on purely advisory committees, such as the 
proposed Regulatory Advisory Committee, is insufficient to provide fair 
representation in the administration of the affairs of the 
exchange.\112\ Specifically, the SIA and TBMA believe that the 
Regulatory Advisory Committee's advisory role is insufficient since its 
recommendations are non-binding, and that the mandate of the Committee 
is too narrow because it has no authority over rulemaking, spending, 
funding, or budget decisions of NYSE Regulation.\113\ They believe that

[[Page 11261]]

member involvement in rulemaking is essential to counter the conflicts 
of interest posed by a for-profit exchange regulating its members, and 
that member representation in funding is an appropriate safeguard 
against excessive fees and budgeting demands.\114\ Another commenter 
believes that fair representation in the governance process is crucial 
to prevent preferential treatment of certain members, and notes that 
the NYSE, although ``concededly complying with minimum fair 
representation requirements,'' proposes to decrease the involvement of 
its independent constituencies in management by eliminating the Board 
of Executives.\115\
---------------------------------------------------------------------------

    \112\ SIA/TBMA Letter, supra note 6, at 4.
    \113\ Id. at 16-17. The Commission notes that proposed NYSE Rule 
20(b) provides that the Regulatory Advisory Committee shall act in 
an advisory capacity regarding regulatory rules other than trading 
rules, and that the Market Performance Committee of NYSE Market 
shall act in an advisory capacity regarding trading rules.
    \114\ Id. at 17-18. The SIA and TBMA also believe that it is 
appropriate and necessary that members participate in decisions 
regarding the use and allocation of funds collected from members, 
through membership and trading activity fees, and that member 
involvement is necessary to ensure that fees for market data and 
other services are cost-justified and not used to cross-subsidize 
other products or services. Id. at 18.
    The SIA and TBMA recommend that members be represented on 
standing committees of New York Stock Exchange LLC, NYSE Market, and 
NYSE Regulation responsible for rulemaking, assessing the 
effectiveness of the regulatory programs and funding, as well as on 
the nominating, governance, and audit committees. Id. at 24.
    \115\ IBAC February Letter, supra note 6, at 7.
---------------------------------------------------------------------------

    The Commission notes that the NYSE has proposed two specific member 
advisory committees, the Market Performance and the Regulatory Advisory 
Committees, pursuant to which members \116\ will have a voice in the 
rulemaking process and disciplinary matters, as well as the Committee 
for Review, which will contain member representatives and will hear 
disciplinary appeals.\117\ Although member participation through these 
committees will be advisory (except with respect to the Committee for 
Review), the board of NYSE Regulation will have to approve all rule 
changes of New York Stock Exchange LLC filed with the Commission. As 
discussed above, the Commission believes that members will have 
representation on the boards of directors of New York Stock Exchange 
LLC and NYSE Regulation (as well as NYSE Market) in compliance with the 
fair representation requirements of the Act. Further, the Commission 
notes that all proposed rule changes, including those imposing fees, 
must be filed by New York Stock Exchange LLC with the Commission. The 
Commission finds that these requirements, together with the composition 
of and selection process for the boards of directors of New York Stock 
Exchange LLC, NYSE Market, and NYSE Regulation, provide for the fair 
representation of members in the administration of the exchange 
consistent with the requirement in Section 6(b)(3) of the Act.\118\
---------------------------------------------------------------------------

    \116\ These two committees will contain representatives of 
member organizations doing business on the floor of the exchange and 
those that do not do business on the floor. See proposed NYSE Rule 
20(b).
    \117\ See supra note and accompanying text. In its response to 
comments, the NYSE also notes the continuing role of the Compliance 
Advisory Committee. NYSE Response to Comments, supra note 7, at 11. 
In addition, New York Stock Exchange LLC and NYSE Regulation have 
the ability to appoint additional advisory committees comprised of 
persons that are not directors. The Commission notes that in its 
filing, the NYSE represented that the NYSE Market and NYSE 
Regulation boards of directors will establish one or more advisory 
committees. The purpose of these advisory committees is to 
facilitate communication and provide input to the boards of 
directors, management, and staff of each of NYSE Market and NYSE 
Regulation and their affiliated entities on policies, programs, 
products, regulatory aspects of products (with respect to NYSE 
Regulation), and services. See supra Sections II.A.2.b. and 
II.A.2.c.
    \118\ 15 U.S.C. 78f(b)(3).
---------------------------------------------------------------------------

e. Representation of Issuers and Investors
    Section 6(b)(3) of the Act \119\ also requires that the rules of an 
exchange provide that one or more directors be representative of 
issuers and investors and not be associated with a member of the 
exchange or with a broker or dealer. One commenter recommended that the 
Commission require that a certain number of directors on the boards of 
NYSE Group and its various subsidiaries be investor 
representatives.\120\ The Commission has previously stated its belief 
that the inclusion of public, non-industry representatives on exchange 
oversight bodies is critical to an exchange's ability to protect the 
public interest.\121\ Further, public representatives help to ensure 
that no single group of market participants has the ability to 
systematically disadvantage other market participants through the 
exchange governance process. The Commission believes that public 
directors can provide unique, unbiased perspectives, which should 
enhance the ability of the exchange board to address issues in a non-
discriminatory fashion and foster the integrity of the New York Stock 
Exchange LLC.
---------------------------------------------------------------------------

    \119\ Id.
    \120\ ICI Letter, supra note 6, at 2.
    \121\ See Regulation of Exchanges and Alternative Trading 
Systems, Exchange Act Release No. 40760 (December 8, 1998), 63 FR 
70844 (December 22, 1998).
---------------------------------------------------------------------------

    The Commission finds that the New York Stock Exchange LLC, NYSE 
Market, and NYSE Regulation boards of directors satisfy the issuer and 
investor representation requirement in Section 6(b)(3) of the Act.\122\ 
Furthermore, in nominating candidates to serve on the boards of 
directors of New York Stock Exchange LLC, NYSE Market, and NYSE 
Regulation, the NYSE has represented that the nominating and governance 
committees of NYSE Group and NYSE Regulation will each nominate at 
least one director candidate to represent issuers and one director 
candidate to represent investors.\123\ In addition, the Commission 
finds that public, non-industry representation on these boards is 
consistent with the Act, and in particular, Section 6(b)(1).\124\
---------------------------------------------------------------------------

    \122\ 15 U.S.C. 78f(b)(3). The Commission notes that it has not 
required the board of directors of a holding company of an exchange 
to satisfy the requirements of Section 6(b)(3) of the Act. See, 
e.g., Securities Exchange Act Release No. 53128 (January 13, 2006), 
71 FR 3550 (January 23, 2006).
    \123\ See Notice, supra note 5, at note 37.
    \124\ 15 U.S.C. 78f(b)(1).
---------------------------------------------------------------------------

B. Relationship of NYSE Group and Its Regulated Subsidiaries; 
Jurisdiction Over NYSE Group

    Although NYSE Group will not itself carry out regulatory functions, 
its activities with respect to the operation of any of New York Stock 
Exchange LLC, NYSE Market, NYSE Regulation, ArcaEx, Pacific Exchange or 
PCX Equities (each, a ``Regulated Subsidiary'' and together, the 
``Regulated Subsidiaries'') must be consistent with, and not interfere 
with, the Regulated Subsidiaries' self-regulatory obligations. The 
proposed NYSE Group corporate documents include certain provisions that 
are designed to maintain the independence of the Regulated 
Subsidiaries' self-regulatory functions from NYSE Group, enable the 
Regulated Subsidiaries to operate in a manner that complies with the 
federal securities laws, including the objectives of Sections 6(b) and 
19(g) of the Act,\125\ and facilitate the ability of the Regulated 
Subsidiaries and the Commission to fulfill their regulatory and 
oversight obligations under the Act.\126\
---------------------------------------------------------------------------

    \125\ 15 U.S.C. 78f(b) and 15 U.S.C. 78s(g).
    \126\ See proposed NYSE Group Certificate of Incorporation 
Article VI, Section 8; Article X; Article XI; Article XII; and 
Article XIII. See also NYSE Group Bylaws, Article VII, Section 7.9.
---------------------------------------------------------------------------

    For example, under the proposed NYSE Group Certificate of 
Incorporation, NYSE Group shall comply with the federal securities laws 
and the rules and regulations thereunder and shall cooperate with the 
Commission and the Regulated Subsidiaries.\127\ Also, each director,

[[Page 11262]]

officer, and employee of NYSE Group, in discharging his or her 
responsibilities shall comply with the federal securities laws and the 
rules and regulations thereunder, cooperate with the Commission, and 
cooperate with the Regulated Subsidiaries.\128\ In addition, in 
discharging his or her responsibilities as a member of the board, each 
director of NYSE Group must, to the fullest extent permitted by 
applicable law, take into consideration the effect that NYSE Group's 
actions would have on the ability of the Regulated Subsidiaries to 
carry out their responsibilities under the Act.\129\ NYSE Group, its 
directors, officers, and employees also shall give due regard to the 
preservation of the independence of the self-regulatory functions of 
the Regulated Subsidiaries.\130\ Further, the NYSE Group agrees to keep 
confidential all confidential information pertaining to the self-
regulatory function of New York Stock Exchange LLC, NYSE Market, NYSE 
Regulation, the Pacific Exchange, and PCX Equities, and not use such 
information for any commercial \131\ purposes.\132\
---------------------------------------------------------------------------

    \127\ See proposed NYSE Group Certificate of Incorporation, 
Article XII.
    \128\ See proposed NYSE Group Certificate of Incorporation, 
Article VI, Section 8.
    \129\ See id.
    \130\ See proposed NYSE Group Certificate of Incorporation, 
Article XII.
    \131\ The Commission believes that any non-regulatory use of 
such information would be for a commercial purpose.
    \132\ See proposed NYSE Group Certificate of Incorporation, 
Article XI. The NYSE Group Certificate of Incorporation states that 
none of its provisions shall be interpreted so as to limit or impede 
the rights of the Commission or any of the Regulated Subsidiaries to 
access and examine such confidential information pursuant to the 
Federal securities laws and the rules and regulations thereunder, or 
to limit or impede the ability of any officers, directors, 
employees, or agents of NYSE Group to disclose such confidential 
information to the Commission or the Regulated Subsidiaries. Id.
    The SIA and TBMA note that the NYSE Delegation Agreement 
provides that trading data that comes into the possession of NYSE 
Regulation from either New York Stock Exchange LLC or NYSE Market 
shall be treated as confidential and not be made available to the 
public. They believe this provision should be modified to clarify it 
is not intended to restrict access to market data, and that all 
trading data (other than counterparty names) should be available at 
cost after a brief period of time. SIA/TBMA Letter, supra note 6, at 
20. The NYSE notes that this provision by its terms applies only to 
confidential information pertaining to the self-regulatory function 
of New York Stock Exchange LLC or a delegated regulatory 
responsibility and therefore would not apply to the type of market 
data that has been for years disseminated to the public. NYSE 
Response to Comments, supra note 7, at A-2.
---------------------------------------------------------------------------

    In addition, NYSE Group's books and records will be subject at all 
times to inspection and copying by the Commission and, to the extent 
related to its operation or administration, any Regulated Subsidiary, 
and are deemed to be the books and records of the Regulated 
Subsidiaries for purposes of and subject to oversight pursuant to the 
Act.\133\ NYSE Group, its directors and officers, and those of its 
employees whose principal place of business and residence is outside of 
the United States, also submit to the jurisdiction of the U.S. federal 
courts and the Commission with respect to activities relating to the 
Regulated Subsidiaries.\134\
---------------------------------------------------------------------------

    \133\ See proposed NYSE Group Certificate of Incorporation, 
Article XI.
    \134\ See proposed NYSE Group Certificate of Incorporation, 
Article X.
---------------------------------------------------------------------------

    Finally, the NYSE Group Certificate of Incorporation and Bylaws 
require that, for so long as NYSE Group controls any of the Regulated 
Subsidiaries, any changes to the NYSE Group Certificate of 
Incorporation and Bylaws be submitted to the board directors of the New 
York Stock Exchange LLC, NYSE Market, NYSE Regulation, the Pacific 
Exchange, and PCX Equities, and if any such boards of directors 
determines that such amendment is required to be filed with or filed 
with and approved by the Commission pursuant to Section 19 of the Act 
\135\ and the rule thereunder, such change shall not be effective until 
filed with or filed with and approved by, the Commission.\136\ The 
Commission finds that these provisions are consistent with the Act, and 
that they will assist New York Stock Exchange LLC in fulfilling its 
self-regulatory obligations and in administering and complying with the 
requirements of the Act.
---------------------------------------------------------------------------

    \135\ 15 U.S.C. 78s.
    \136\ See proposed NYSE Group Certificate of Incorporation, 
Article XIII and NYSE Group Bylaws, Article VII, Section 7.9.
---------------------------------------------------------------------------

    Under Section 20(a) of the Act,\137\ any person with a controlling 
interest in New York Stock Exchange LLC and the Pacific Exchange would 
be jointly and severally liable with and to the same extent that New 
York Stock Exchange LLC and the Pacific Exchange are 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 
\138\ 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 \139\ 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. 
These provisions are applicable to NYSE Group's dealing with its 
Regulated Subsidiaries.
---------------------------------------------------------------------------

    \137\ 15 U.S.C. 78t(a).
    \138\ 15 U.S.C. 78t(e).
    \139\ 15 U.S.C. 78u-3.
---------------------------------------------------------------------------

    The Commission received four comment letters on the proposed rule 
change questioning Gerald Putnam's fitness to serve as an officer of 
NYSE Group or to lead the NYSE upon consummation of the Merger.\140\ 
The issue of Mr. Putnam's fitness to serve as an officer or director of 
a public company or the NYSE is not before the Commission in the 
context of this rule filing. Pursuant to Section 19(b)(1) of the 
Act,\141\ an SRO (such as the NYSE) is required to file with the 
Commission any proposed rule or any proposed change in, addition to, or 
deletion from the rules of such SRO. Further, pursuant to Section 
19(b)(2) of the Act,\142\ the Commission shall approve a proposed rule 
change filed by an SRO if the Commission finds that such proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to the SRO. The NYSE is not providing 
in this filing for any particular person to serve as an officer or 
director of NYSE Group or any of its subsidiaries. In addition, Section 
19(h)(4) of the Act \143\ authorizes the Commission, if in its opinion 
such action is necessary or appropriate in the public interest, for the 
protection of investors, or otherwise in furtherance of the purposes of 
the Act, to remove or censure an officer or director of a national 
securities exchange if it finds, after notice and opportunity for a 
hearing, that such officer or director has willfully violated any 
provision of the Act, the rules or regulations thereunder, or the rules 
of such exchange, willfully abused his authority, or without reasonable 
justification or excuse has failed to enforce compliance with any such 
provision by any member or person associated with a member.
---------------------------------------------------------------------------

    \140\ See Borsellino Letter, Kopecky Letter, Lozman Letter, and 
Nathanson Letter, supra note 6. After the Merger, NYSE Group will be 
a publicly traded company and the holding company for the businesses 
of the NYSE and Archipelago. Mr. Putnam is currently the chairman of 
the board of directors and chief executive officer of Archipelago 
and the chairman of the Pacific Exchange. Upon completion of the 
Merger, it is intended that Mr. Putnam will be named as co-president 
and chief operating officer of NYSE Group. See letter from Kevin 
J.P. O'Hara, Chief Administrative Officer, General Counsel, and 
Secretary, Pacific Exchange, to Nancy M. Morris, Secretary, 
Commission, dated February 8, 2006.
    \141\ 15 U.S.C. 78s(b)(1).
    \142\ 15 U.S.C. 78s(b)(2).
    \143\ 15 U.S.C. 78s(h)(4).

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[[Page 11263]]

C. Independence of Self-Regulatory Function

    The NYSE has proposed several measures to help ensure the 
independence of its regulatory function from its market operations and 
other commercial interests. For example, all directors on the board of 
NYSE Regulation (other than its chief executive officer) will be 
required to be independent of management of NYSE Group and its 
subsidiaries, as well as of members and listed companies. In addition, 
a majority of the members of the NYSE Regulation board must be 
directors that are not also directors of NYSE Group. Although the NYSE 
will not have a regulatory oversight committee, the board of NYSE 
Regulation is expected to function in such capacity. Further, NYSE 
Regulation will have its own nominating and governance committee, 
rather than share the NYSE Group nominating and governance committee, 
and this committee also will be composed of a majority of directors 
that are not also directors of NYSE Group.
    The chief executive officer of NYSE Regulation will function as the 
exchange's chief regulatory officer. This position will report solely 
to the NYSE Regulation board and not to any other NYSE Group entity, 
although he or she may attend the board meetings of such other entities 
as deemed appropriate to carry out his or her responsibilities.
    The NYSE also proposes to establish a separate compensation 
committee for NYSE Regulation. This committee also will have a majority 
of non-NYSE Group directors. The NYSE Regulation compensation committee 
will be responsible for setting the compensation for NYSE Regulation 
employees; thus, the NYSE Group compensation committee will not have a 
say in this process.
    The Commission further notes that the NYSE has taken steps to 
safeguard the use of regulatory monies. Specifically, New York Stock 
Exchange LLC will not be permitted to use any assets of, or any 
regulatory fees, fines, or penalties collected by, NYSE Regulation for 
commercial purposes or distribute such assets, fees, fines, or 
penalties to NYSE Group or any entity other than NYSE Regulation.\144\
---------------------------------------------------------------------------

    \144\ The NYSE originally included this covenant in the NYSE 
Delegation Agreement. In Amendment No. 8, the NYSE deleted this 
provision from the NYSE Delegation Agreement and included the 
provision in the Operating Agreement of New York Stock Exchange LLC. 
The substance remains the same.
---------------------------------------------------------------------------

    The Commission is concerned about 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.\145\ In 
the Notice, the NYSE acknowledged that ownership of, or a control 
relationship with, a member organization by NYSE Group or any of its 
subsidiaries would necessitate that the foregoing concerns be first 
addressed with, and to the satisfaction of, the Commission.\146\ 
Proposed NYSE Rule 2B provides that without prior Commission approval, 
the exchange or any entity with which it is affiliated shall not, 
directly or indirectly, acquire or maintain an ownership interest in a 
member organization. In addition, a member organization shall not be or 
become an affiliate of the exchange, or an affiliate of any affiliate 
of the exchange.\147\
---------------------------------------------------------------------------

    \145\ See Securities Exchange Act Release No. 52497 (September 
22, 2005), 70 FR 56949 (September 29, 2005) (order approving 
Archipelago's acquisition of the Pacific Exchange).
    \146\ The NYSE represented that it does not currently, nor after 
the Merger will it, own or control any of its member organizations. 
The NYSE also stated that to the extent that a member organization 
will be the owner of NYSE Group common stock, the ownership 
limitations described above are intended to deal with the issues 
that might otherwise be presented. See Notice, supra note 5, at 
2084.
    \147\ Proposed NYSE Rule 2B also provides that it does not 
prohibit a member organization from acquiring or holding an equity 
interest in NYSE Group that is permitted by the ownership 
limitations contained in the NYSE Group Certificate of 
Incorporation.
---------------------------------------------------------------------------

    One commenter on the proposed rule change specifically expressed 
the view that the proposed merger is structured in a manner to 
safeguard the regulatory and enforcement functions of the NYSE.\148\ In 
particular, the commenter, noting that the future location and 
oversight of the regulatory functions of the NYSE is a key issue, 
believes that the proposed rule change ``presents a very thoughtful 
structure designed to ensure the independence of NYSE Regulation, while 
maintaining its closeness to the market.'' \149\ The commenter believes 
that this structure will assure that the for-profit status of NYSE 
Group does not interfere with NYSE Regulation meeting its duties to 
investors and other market participants, while promoting market-
sensitive regulation.\150\
---------------------------------------------------------------------------

    \148\ See NAST Letter, supra note 6.
    \149\ Id. at 2.
    \150\ Id. at 2.
---------------------------------------------------------------------------

    Several other commenters express concerns about potential conflicts 
of interest between the NYSE's self-regulatory obligations and its 
commercial activities, particularly in a for-profit structure. These 
commenters do not believe that the NYSE's proposal provides for 
adequate separation of such functions.\151\
---------------------------------------------------------------------------

    \151\ See CalPERS Letter, IBAC February Letter, ICI Letter, NASD 
Letter, Nasdaq February Letter, and SIA/TBMA Letter, supra note 6. 
See also Nasdaq Extension Letter, supra note 6.
---------------------------------------------------------------------------

    The SIA and TBMA emphasize their concern that the exchange may use 
its regulatory power to disadvantage its competitors (i.e., its 
members).\152\ They believe this concern is heightened with a 
governance structure that provides NYSE Group, the for-profit entity, 
control of the exchange board and a dominant role on the regulatory 
board (coupled with no direct member representation on those 
boards).\153\ They also believe that, because New York Stock Exchange 
LLC is the sole owner of NYSE Regulation and the NYSE Delegation 
Agreement gives New York Stock Exchange LLC authority to review, 
approve, or reject action taken by NYSE Regulation (other than action 
taken upon review of disciplinary decisions by the board of NYSE 
Regulation),\154\ there cannot be

[[Page 11264]]

sufficient regulatory independence with the presence of NYSE Group 
directors on the New York Stock Exchange LLC board.\155\ The SIA and 
TBMA recommend that the NYSE be required to create greater structural 
separation by reducing or eliminating NYSE Group representation on the 
New York Stock Exchange LLC and NYSE Regulation boards and by 
permitting direct member representation on those boards.\156\
---------------------------------------------------------------------------

    \152\ SIA/TBMA Letter, supra note 6, at 3. The SIA and TBMA also 
note the potential for the profit motive of a shareholder-owned 
exchange to detract from self-regulation through, for example, 
insufficient funding of regulation. Id. at 6.
    \153\ Id. at 6-7. Other commenters also point to NYSE Group's 
control of NYSE Regulation as a reason there is insufficient 
regulatory independence within the proposed structure. Nasdaq states 
that the selection of NYSE Regulation directors is ultimately 
controlled by NYSE Group. Nasdaq February Letter, supra note 6, at 
5. IBAC believes that NYSE Group will have control over a majority 
of NYSE Regulation's board, through its appointment of the NYSE 
Group directors and non-NYSE Group directors (which must constitute 
a majority) on NYSE Regulation's board. IBAC February Letter, supra 
note 6, at 5, 8. The Commission notes that the NYSE Group directors 
on the NYSE Regulation board will be a minority, and thus will not 
by themselves be able to control any decisions of the board. In 
addition, the non-NYSE Group directors on the NYSE Regulation 
board--which must be a majority of the board--will not be selected 
by NYSE Group or New York Stock Exchange LLC. Rather, they will be 
selected either by (1) the NYSE Regulation DCRC, which is composed 
of member representatives, or members, through a petition process, 
or (2) the NYSE Regulation nominating and governance committee, 
which must have a majority of non-NYSE Group directors. New York 
Stock Exchange LLC must appoint or elect such persons as directors 
(unless they do not meet the independence requirements or are 
subject to a statutory disqualification). See supra Sections 
II.A.2.c. and II.A.2.d. for a more detailed description of the board 
nomination and election process for NYSE Regulation.
    \154\ Although proposed New York Stock Exchange Rules 475, 476, 
and 476A state that the New York Stock Exchange LLC board will be 
able to review disciplinary decisions pursuant to those rules, New 
York Stock Exchange LLC has delegated such authority to NYSE 
Regulation pursuant to the NYSE Delegation Agreement, and has 
explicitly stated in such agreement that action taken by NYSE 
Regulation shall be final action of the exchange. Thus, New York 
Stock Exchange LLC will not be able to review any disciplinary 
action taken by NYSE Regulation. Any change to the NYSE Delegation 
Agreement would be required to be filed as a proposed rule change 
pursuant to Section 19(b) of the Act 15 U.S.C. 78f(b).
    \155\ SIA/TBMA Letter, supra note 6, at 8-9.
    \156\ Id. at 4. The ICI also suggests that the NYSE increase the 
number of NYSE Regulation board members that are not NYSE Group 
board members to more than a simple majority. ICI Letter, supra note 
6, at 2.
    See also supra notes 102 to 110 and accompanying text for a 
discussion of the SIA and TBMA's comments on, and the Commission's 
response to, the NYSE's proposal that all board members be 
independent.
---------------------------------------------------------------------------

    Several commenters believe that a for-profit structure is 
inconsistent with self-regulatory obligations. Nasdaq believes that it 
is fundamentally inconsistent with the mission of a for-profit entity 
for the entire regulatory apparatus to exist within the for-profit 
entity, given the fiduciary duty to maximize profits.\157\ IBAC also 
emphasizes its view that the corporate fiduciary duty of directors in a 
for-profit entity to maximize profits is inconsistent with SRO 
obligations. As long as NYSE Group controls the appointment of a 
majority of NYSE Regulation directors, IBAC believes that its profit 
motive will ``reign supreme,'' \158\ and is concerned about 
compromising exchange operations in favor of short term profits.\159\ 
The SIA and TBMA also raise this issue, questioning why language 
requiring the directors of NYSE Group to take into consideration the 
effect their actions would have on the ability of the Regulated 
Subsidiaries to carry out their responsibilities under the Act, and the 
language requiring the NYSE Group directors to give due regard to the 
preservation of the independence of the self-regulatory function of the 
Regulated Subsidiaries, would carry more weight than the fiduciary 
obligation to maximize profits.\160\
---------------------------------------------------------------------------

    \157\ Nasdaq February Letter, supra note 6, at 5. Nasdaq 
specifically mentions a concern regarding under or over regulation 
of members. Id.
    \158\ IBAC February Letter, supra note 6, at 3-5.
    \159\ Id. at 4.
    \160\ SIA/TBMA Letter, supra note 6, at 9-10.
---------------------------------------------------------------------------

    Nasdaq believes that it is not appropriate to have all front-line 
member regulatory responsibilities in the overall entity that operates 
the trading facility.\161\ Nasdaq notes that, pursuant to its exchange 
registration application, it has vested most of its front-line 
regulatory responsibilities in NASD through contract, and that NASD 
will no longer be affiliated with Nasdaq. Nasdaq contrasts its 
structure with the NYSE's proposed structure, noting that all of the 
regulatory responsibilities of the New York Stock Exchange LLC and the 
Pacific Exchange will be vested in entities that are subject to the 
control of NYSE Group, a for-profit entity.\162\ IBAC requests that the 
Commission consider spinning off NYSE Regulation as separate not-for-
profit entity completely independent of NYSE Group,\163\ while CalPERS 
recommends a model that has complete separation between the regulatory 
and non-regulatory functions, such as the enterprise model for the 
Public Company Accounting Oversight board.\164\ NASD believes that 
implementing a hybrid model of self-regulation will eliminate inherent 
conflicts when a regulator operates a market.\165\
---------------------------------------------------------------------------

    \161\ Nasdaq February Letter, supra note 6, at 5.
    \162\ Id. at 5.
    \163\ IBAC February Letter, supra note 6, at 22.
    \164\ CalPERS Letter, supra note 6, at 2. This model would 
require the Commission to appoint directly the members of the entity 
overseeing NYSE Regulation. CalPERS also recommends that, in the 
absence of complete separation, at a minimum the Commission and NYSE 
Group monitor the effectiveness of NYSE Regulation over the next 18 
months and report publicly on their findings. Id. In this regard, 
the Commission notes that it has ongoing regulatory, examination, 
and enforcement programs designed to carry out its oversight 
obligations with respect to the exchanges and other SROs that it 
regulates.
    \165\ NASD Letter, supra note 6. See also supra notes 21 to 25 
and accompanying text.
---------------------------------------------------------------------------

    To the extent that a well-regulated market is considered by an 
SRO's owners to be in their commercial interests, demutualization could 
better align the goals of SRO owners with their statutory obligations. 
The NYSE believes that NYSE Group has ``every incentive'' to ensure 
robust regulatory oversight of its market, members, and listed 
companies because a well-regulated marketplace is essential to 
attracting, and retaining, listing and trading on its market.\166\ To 
the extent that there is a concern that profit motives may override the 
incentive to have a well-regulated market, as detailed above in this 
section the NYSE has proposed an overall structure, with several 
specific safeguards, designed to allow the exchange's regulatory 
program to function independently from its market operations and other 
commercial interests. As a result, the Commission finds that the NYSE's 
proposal, taken together, is consistent with the Act, particularly with 
Section 6(b)(1),\167\ which requires an exchange to be so organized and 
have the capacity to carry out the purposes of the Act.
---------------------------------------------------------------------------

    \166\ NYSE Response to Comments, supra note 7, at 5.
    \167\ 15 U.S.C. 78f(b)(1).
---------------------------------------------------------------------------

D. Delegation of Authority From New York Stock Exchange LLC

    As described in detail in the Notice, the NYSE Delegation Agreement 
provides that New York Stock Exchange LLC will delegate to NYSE 
Regulation the performance of regulatory functions.\168\ New York Stock 
Exchange LLC will delegate performance of its market functions to NYSE 
Market pursuant to the NYSE Delegation Agreement.\169\ The NYSE also 
proposes to add NYSE Rule 20(a), which codifies New York Stock Exchange 
LLC delegation to NYSE Market and NYSE Regulation to act on behalf of 
New York Stock Exchange LLC, pursuant to the NYSE Delegation 
Agreement.\170\
---------------------------------------------------------------------------

    \168\ See Notice at ``Delegation and Protection of SRO 
Functions; Services Agreement'' and NYSE Delegation Agreement, II.A.
    \169\ See Notice at ``Delegation and Protection of SRO 
Functions; Services Agreement'' and NYSE Delegation Agreement, 
III.A.
    \170\ See proposed NYSE Rule 20(a).
---------------------------------------------------------------------------

    New York Stock Exchange LLC, however, expressly retains ultimate 
responsibility for the fulfillment of its statutory and self-regulatory 
obligations under the Act. Accordingly, New York Stock Exchange LLC 
will retain ultimate responsibility for such delegated responsibilities 
and functions, and any actions taken pursuant to delegated authority 
will remain subject to review, approval, or rejection by the board of 
directors of New York Stock Exchange LLC in accordance with procedures 
established by that board of directors (provided however, that action 
taken upon review of disciplinary decisions by the NYSE Regulation 
board of directors shall be final action of the New York Stock Exchange 
LLC). The NYSE has filed the NYSE Delegation Plan as part of its rules.
    New York Stock Exchange LLC expressly retains the authority to: (1) 
Delegate authority to NYSE Regulation and, to the extent applicable, 
NYSE Market to take actions on behalf of the New York Stock Exchange 
LLC; (2) elect the members of the boards of directors of NYSE Market 
and NYSE Regulation; (3) coordinate actions of NYSE Regulation and NYSE 
Market as necessary; (4) resolve as appropriate any disputes between 
NYSE Regulation and NYSE Market; and (5) direct NYSE Regulation and 
NYSE Market to take

[[Page 11265]]

action necessary to effectuate the purposes and functions of New York 
Stock Exchange LLC, consistent with the independence of the regulatory 
functions delegated to NYSE Regulation, exchange rules, policies and 
procedures, and the federal securities laws.\171\ All other regulatory 
and market functions are delegated to NYSE Regulation and NYSE Market.
---------------------------------------------------------------------------

    \171\ See Notice at ``Delegation and Protection of SRO 
Functions; Services Agreement'' and NYSE Delegation Agreement, I.
---------------------------------------------------------------------------

1. Delegation to NYSE Regulation
    NYSE Regulation will have delegated authority to, among other 
things, determine regulatory and trading policy relating to the 
business of New York Stock Exchange LLC members and member 
organizations and trading on NYSE Market, develop and adopt necessary 
and appropriate rule changes, monitor the qualifications of members and 
member organizations, and their associated persons, administer programs 
for the surveillance and enforcement of trading on NYSE Market and any 
of its facilities, initiate disciplinary actions to assure compliance 
with the rules and procedures of New York Stock Exchange LLC and the 
federal securities laws, and establish and assess regulatory fees. No 
assets of, and no regulatory fees, fines or penalties collected by NYSE 
Regulation, will be distributed or otherwise used by the rest of NYSE 
Group.
    As noted above in Section II.C., in their comment letter the SIA 
and TBMA express concern about the fundamental conflict between the 
interests of a for-profit entity and the members that it regulates, and 
their belief that the NYSE proposal does not provide for adequate 
separation of its regulatory and commercial functions.\172\ To support 
this contention, the SIA and TBMA point, in part, to the provision of 
the NYSE Delegation Agreement that provides that actions taken by NYSE 
Regulation or NYSE Market pursuant to delegated authority remain 
subject to review, approval, or rejection by the board of directors of 
New York Stock Exchange LLC (other than action taken upon review of 
disciplinary decisions by the board of NYSE Regulation, which shall be 
final action of the New York Stock Exchange LLC).\173\
---------------------------------------------------------------------------

    \172\ See SIA/TBMA Letter, supra note 6.
    \173\ Id. at 8.
---------------------------------------------------------------------------

    The Commission recognizes the SIA's and TBMA's concern with respect 
to oversight by New York Stock Exchange LLC of functions that have been 
delegated to NYSE Regulation. As discussed more fully above in Section 
II.C., the NYSE has proposed certain measures that are designed to 
ensure the independence of regulation from the NYSE's commercial 
interests. For example, NYSE Regulation will have its own compensation 
and nominating and governance committees, both of which must be 
composed of a majority of non-NYSE Group directors. In addition, New 
York Stock Exchange LLC will not have the right to review any 
disciplinary action taken by NYSE Regulation. Further, the Commission 
notes that any proposed rule change of New York Stock Exchange LLC is 
required to be filed with, or filed with and approved by, the 
Commission pursuant to Section 19(b) of the Act.\174\ The Commission 
also notes its own oversight responsibility with respect to the 
regulatory obligations of New York Stock Exchange LLC and NYSE 
Regulation, as well as the SRO's own legal obligations.\175\
---------------------------------------------------------------------------

    \174\ 15 U.S.C. 78s(b).
    \175\ See, e.g., 1996 21(a) Report and 2005 NYSE Administrative 
Cease-and-Desist Proceeding, supra note 108, and Report of 
Investigation Pursuant to Section 21(a) of the Securities Exchange 
Act of 1934 Regarding The Nasdaq Stock Market, Inc., as Overseen By 
Its Parent, The National Association of Securities Dealers, Inc., 
February 9, 2005, available at the Commission's Web site (http://www.sec.gov/litigation/investreport/34-51163.htm
).

---------------------------------------------------------------------------

    The Commission finds that New York Stock Exchange LLC's plan of 
delegation is consistent with the requirements of Section 6(b)(1) of 
the Act, which requires an exchange to be so organized and have the 
capacity to be able to carry out the purposes of the Act.\176\ The 
Commission finds it is consistent with the Act for New York Stock 
Exchange LLC to delegate its regulatory functions, while retaining 
ultimate responsibility for ensuring that its exchange business is 
conducted in a manner consistent with the requirements of the Act.
---------------------------------------------------------------------------

    \176\ 15 U.S.C. 78f(b)(1).
---------------------------------------------------------------------------

2. Delegation to NYSE Market
    NYSE Market will have delegated authority to, among others, oversee 
the operation of NYSE Market, develop and adopt listing rules and rules 
governing the issuance of Trading Licenses, and establish and assess 
listing, access, transaction, and market data fees.\177\ The Commission 
finds it is consistent with the Act for New York Stock Exchange LLC to 
delegate its market functions, while retaining ultimate responsibility 
for ensuring that its exchange business is conducted in a manner 
consistent with the requirements of the Act.
---------------------------------------------------------------------------

    \177\ See Notice at ``Delegation and Protection of SRO 
Functions; Services Agreement'' and NYSE Delegation Agreement, 
III.A. NYSE Market's responsibilities will include the operation of 
Market Watch, a unit whose functions include, among others, 
coordination with listed companies, floor officials, and regulatory 
staff of NYSE Regulation with respect to dissemination of news and 
trading halts. This unit is distinguished from the Stock Watch unit 
within NYSE Regulation, whose functions will include review of 
exception reports, alerts, and investigations. One commenter 
questions whether it is appropriate to include the Market Watch 
function within NYSE Market's responsibilities, in light of the 
indictment of several NYSE floor officials and related Commission 
cease and desist proceedings. Nasdaq February Letter, supra note 6, 
at 9. The NYSE notes that Market Watch's duties are primarily 
informational, not regulatory, in nature. NYSE Response to Comments, 
supra note 7, at 14. In addition, NYSE represents that Market Watch 
will coordinate with regulatory staff of NYSE Regulation. See 
Notice, supra note 5, at note 29. The Commission believes that this 
delegation of functions to NYSE Market is consistent with the Act.
    The NYSE also represented that NYSE Market will establish the 
principles and policies under which trading on NYSE Market will be 
conducted, and those principles and policies will be codified by 
NYSE Regulation in the rules of New York Stock Exchange LLC. In 
addition, the NYSE represented that, in light of the self-regulatory 
responsibilities of New York Stock Exchange LLC and NYSE Market, 
those entities as well as NYSE Group, will be responsible for 
referring to NYSE Regulation, for investigation and action as 
appropriate, any possible rule violations that come to their 
attention. See Amendment No. 6.
---------------------------------------------------------------------------

    In addition, NYSE Market will have the authority to act as a 
securities information processor (``SIP'') for quotations and 
transaction information related to securities traded on NYSE Market and 
other trading facilities operated by NYSE Market.\178\ Section 
11A(b)(1) of the Act \179\ provides for the registration with the 
Commission of a securities information processor \180\ that is acting 
as an exclusive processor.\181\ Because NYSE Market will be engaging on 
an exclusive basis on behalf of New York Stock Exchange LLC in 
collecting, processing, or preparing for distribution or publication 
information with respect to transactions or quotations on or effected 
or made by means of a facility of New York Stock Exchange LLC, it is an 
exclusive processor that will, as of the closing date of the Merger, be 
required to register pursuant to Section 11A(b) of the Act.\182\
---------------------------------------------------------------------------

    \178\ See NYSE Delegation Agreement, Section III.A.3.
    \179\ 15 U.S.C. 78k-1(b)(1).
    \180\ See Section 3(a)(22)(A) of the Act, 15 U.S.C. 
78c(a)(22)(A), for the definition of a SIP. An SRO is explicitly 
excluded from the definition of a SIP.
    \181\ Section 3(a)(22)(B) of the Act, 15 U.S.C. 78c(a)(22)(B) 
defines an exclusive processor. Rule 609 under the Act, 17 CFR 
242.609, requires that the registration of a SIP be on Form SIP, 17 
CFR 249.1001.
    \182\ 15 U.S.C. 78k-1(b)(1). An SRO that is an exclusive 
processor is exempt from registration under Section 11A(b)(1) of the 
Act because it is excluded from designation as a SIP.
---------------------------------------------------------------------------

    Section 11A(b)(1) of the Act \183\ provides that the Commission 
may, by rule or order, upon its own motion or upon application by a 
SIP, conditionally or unconditionally exempt any SIP from

[[Page 11266]]

any provision of Section 11A of the Act \184\ or the rules or 
regulation thereunder, if the Commission finds that such exemption is 
consistent with the public interest, the protection of investors, and 
the purposes of Section 11A of the Act,\185\ including the maintenance 
of fair and orderly markets in securities and the removal of 
impediments to and perfection of the mechanism of a national market 
system.\186\
---------------------------------------------------------------------------

    \183\ 15 U.S.C. 78k-1(b)(1).
    \184\ 15 U.S.C. 78k-1.
    \185\ Id.
    \186\ See also Rule 609(c), 17 CFR 242.609(c).
---------------------------------------------------------------------------

    The Commission has determined to grant NYSE Market a temporary 
exemption from registration under Section 11A(b)(1) of the Act and Rule 
609 thereunder for a period of thirty (30) days from the date of 
closing of the Merger, while an application for registration or an 
application for an exemption pursuant to Section 11A(b)(1) of the Act 
and Rule 609 thereunder is prepared.\187\ The Commission also has 
determined to grant a conditional continuation of the 30-day temporary 
exemption from registration of NYSE Market, conditioned upon its filing 
of an application for registration or application for an exemption from 
registration within the 30-day time period. Such continuation shall 
continue for a period of 90 days following the end of the 30-day period 
and will afford interested persons an opportunity to submit written 
comments concerning the application filed with the Commission.\188\
---------------------------------------------------------------------------

    \187\ See Securities Exchange Act Release No. 12079 (February 6, 
1976) (order granting temporary exemption from SIP registration for 
Nasdaq for (1) a period of 30 days following the consummation of the 
sale of the Nasdaq system to NASD and the assignment of NASD's 
rights in such purchase to Nasdaq, a subsidiary of NASD and (2) an 
additional period of ninety (90) days following the day of 
publication of notice of filing of an application for registration 
or exemption from registration, if such application is received 
within the original 30 days). See also Securities Exchange Act 
Release Nos. 13278 (February 17, 1977) (granting Bradford National 
Clearing Corporation, which was to perform SIP functions for the 
Pacific Exchange, a 90-day temporary exemption from registration as 
a SIP pending Commission determination of Bradford's application for 
a permanent exemption, such 90-day period to begin from the 
consummation of the agreement calling for Bradford's assumption of 
the SIP services) and 27957 (April 27, 1990), 55 FR 19140 (May 8, 
1990) (granting NASD a 90-day temporary exemption from registration 
of its subsidiary, Market Services, Inc., which was to operate 
NASD's PORTAL market, as a SIP pending Commission review of its 
application for registration filed with the Commission).
    \188\ Publication of notice of the filing of an application for 
registration is required by Section 11A(b)(3) of the Act, 15 U.S.C. 
78k-1(b)(3).
---------------------------------------------------------------------------

    Upon closing of the Merger, NYSE Market will succeed to the 
exchange business of the NYSE and will be regulated as a facility of 
New York Stock Exchange LLC.\189\ The Commission therefore finds that 
such temporary exemptions are consistent with the public interest, the 
protection of investors, and the purposes of Section 11A of the Act. 
The exemptions are for a limited period of time during which the 
Commission will have regulatory authority over NYSE Market.
---------------------------------------------------------------------------

    \189\ After the Merger, NYSE Market will hold all of the current 
assets and liabilities of the NYSE other than its registration as a 
national securities exchange and other than assets or liabilities 
relating to regulator functions. See Notice, supra note 5.
---------------------------------------------------------------------------

E. Regulation and Disciplinary Process

    Currently, the regulatory responsibilities of the NYSE are 
performed within the NYSE through the NYSE regulatory group.\190\ The 
Office of the Hearing Board and the Chief Hearing Officer are not 
currently within the NYSE regulatory group; instead, they report to the 
NYSE board of directors through its regulatory oversight committee. The 
heads of Corporate Audit and Regulatory Quality Review (``RQR'') 
likewise currently report to the regulatory oversight committee with 
respect of RQR functions.
---------------------------------------------------------------------------

    \190\ This group is currently referred to as ``NYSE Regulation'' 
and was so referenced in the Notice. To avoid confusion with NYSE 
Regulation, the not-for profit entity that will be a wholly owned 
subsidiary of New York Stock Exchange LLC after the Merger, we are 
referring to the current regulatory group as ``NYSE regulatory 
group.''
---------------------------------------------------------------------------

    After the Merger, the current NYSE regulatory group will operate as 
NYSE Regulation, a separate not-for-profit entity. NYSE Regulation will 
have the same responsibilities as the NYSE regulatory group's current 
responsibilities, and will contract to provide certain regulatory 
services to the Pacific Exchange. The NYSE Regulation board of 
directors will perform all the functions of the current NYSE regulatory 
oversight committee, with the Office of the Hearing Board and the RQR 
reporting to the NYSE Regulation board.
    The NYSE has not proposed in this filing any changes to the initial 
disciplinary process.\191\ Initial disciplinary hearings will be held 
before a Hearing Panel, the members of which will be drawn from the 
Hearing Board. The members of the Hearing Board will be appointed by 
the chairman of NYSE Regulation, subject to the approval of the board 
of directors of NYSE Regulation, as will a chief hearing officer and 
one or more other hearing officers.
---------------------------------------------------------------------------

    \191\ The Commission notes that it has recently approved a rule 
change by the NYSE that makes several substantive changes to NYSE 
Rules 475 and 476. The NYSE does not intend to implement these 
changes, however, until April 1, 2006. See Securities Exchange Act 
Release No. 53124 (January 13, 2006), 71 FR 3595 (January 23, 2006). 
For purposes of clarity, Exhibit 5A of Amendment No. 8 reflects the 
changes proposed in this filing against the current operating 
version of NYSE Rules 475 and 476. The NYSE represents that it will 
file a proposed rule change to update Rules 475 and 476, as amended 
by this proposed rule change, to reflect the changes that will be 
implemented on April 1, 2006. See Amendment No. 8, supra note 9, at 
7.
---------------------------------------------------------------------------

    The NYSE has proposed changes to its process for review of 
disciplinary decisions. The proposed changes to NYSE Rules 475 and 476 
provide that appeals of disciplinary decisions will be to the New York 
Stock Exchange LLC board of directors. However, pursuant to the NYSE 
Delegation Agreement, New York Stock Exchange LLC has delegated such 
authority to the board of directors of NYSE Regulation. Action taken by 
the board of directors of NYSE Regulation will be final action of the 
New York Stock Exchange LLC.
    The NYSE has proposed that the board of directors of NYSE 
Regulation will delegate the authority to hear disciplinary appeals to 
the new Committee for Review, which will be the successor committee to 
the current RELS Committee of the NYSE board of directors.\192\ The 
Committee for Review will include both NYSE Regulation directors and 
other individuals representing member constituencies. The NYSE 
represented that the Committee for Review also is expected to include 
individuals representing investor and listed company 
constituencies.\193\
---------------------------------------------------------------------------

    \192\ See proposed NYSE Regulation Bylaws, Article III, Section 
5.
    \193\ See Notice, supra note 5, at 2093.
---------------------------------------------------------------------------

    In addition to the division or department of NYSE Regulation that 
brought the charges, the respondent, or any member of the board of 
directors of NYSE Regulation, the proposed rules provide that any 
member of the Committee for Review will be authorized to call up 
disciplinary decisions of a Hearing Panel for review. In addition, 
newly proposed Executive Floor Governors, who will include at least two 
specialists and two floor brokers and will constitute the most senior 
level of practitioner supervision on the trading floor,\194\ will be 
able to call up disciplinary decisions for review.
---------------------------------------------------------------------------

    \194\ See proposed NYSE Rule 46A. Executive Floor Governors will 
be appointed by the board of directors of New York Stock Exchange 
LLC, in consultation with the board of directors of NYSE Regulation. 
Executive Floor Governors shall generally have the responsibilities 
of the current floor representatives on the Board of Executives, 
including being able to call matters for review.
---------------------------------------------------------------------------

    The NYSE Regulation board of directors can elect to review 
decisions by the Committee for Review. Any such

[[Page 11267]]

decision of the NYSE Regulation board of directors will be considered 
final action of the exchange.\195\ There will be no review by the New 
York Stock Exchange LLC board of directors.
---------------------------------------------------------------------------

    \195\ See NYSE Delegation Agreement at I and II.A.5.
---------------------------------------------------------------------------

    The Commission finds that the changes proposed to the disciplinary 
process are consistent with the Act, in particular Sections 6(b)(6) and 
6(b)(7) of the Act,\196\ in that they provide fair procedures for the 
disciplining of members and persons associated with members.
---------------------------------------------------------------------------

    \196\ 15 U.S.C. 78f(b)(6) and 15 U.S.C. 78f(b)(7).
---------------------------------------------------------------------------

F. Trading Licenses; Access to NYSE Market

    Following the Merger, NYSE Market will issue Trading Licenses that 
will entitle their holders to have physical and electronic access to 
the trading facilities of NYSE Market, subject to the limitations and 
requirements specified in the rules of the New York Stock Exchange 
LLC.\197\ An organization may acquire and hold a Trading License only 
if and for so long as such organization is qualified and approved to be 
a member organization of New York Stock Exchange LLC. A member 
organization holding a Trading License may designate a natural person 
to effect transactions on its behalf on the floor of NYSE Market, 
subject to such qualification and approvals as may be required in the 
rules of the New York Stock Exchange LLC.
---------------------------------------------------------------------------

    \197\ The Trading Licenses will be issued pursuant to the 
conditions and procedures outlined in proposed NYSE Rule 300. The 
NYSE also proposed a transition rule, NYSE Rule 300T, covering the 
initial sale of Trading Licenses.
---------------------------------------------------------------------------

    The price and number of Trading Licenses to be issued will be 
determined annually by means of a Dutch auction, through which NYSE 
Market will establish the clearing price (``Clearing Price'') at which 
all Trading Licenses are sold.\198\ For each auction, NYSE Market will 
determine the minimum price that a bidder will be required to pay for 
each Trading License (``Minimum Bid Price''), which will be no greater 
than 80% of the auction price at the last annual auction. Auction 
participants may enter either priced bids or unpriced ``at the market'' 
bids. At the end of the auction, NYSE Market will select the highest 
bid price that will allow it to maximize its auction revenue. The 
Clearing Price, however, may not be greater than the price that will 
result in the sale of at least 1,000 Trading Licenses.
---------------------------------------------------------------------------

    \198\ Trading Licenses for the following calendar year will be 
sold annually through an auction conducted in December. The price of 
a Trading License will be payable in equal monthly installments in 
advance over the period in which the Trading License is in effect.
---------------------------------------------------------------------------

    NYSE Market will not sell in the auction more than 1,366 Trading 
Licenses. If the bids at the Clearing Price would bring the total 
number of licenses to be sold to more than 1,366, NYSE Market will 
first sell licenses to the unpriced ``at the market'' bids and higher 
priced bids, and then will allocate the remaining available Trading 
Licenses among the bids at the Clearing Price by lot. NYSE Market also 
may, in its discretion, sell the number of Trading Licenses determined 
by the Clearing Price at a price less than the Clearing Price, but not 
lower than the Minimum Bid Price.
    If there are insufficient bids at the Minimum Bid Price (including 
unpriced ``at the market'' bids) for the purchase of at least 1,000 
Trading Licenses, NYSE Market may sell the largest number of Trading 
Licenses that can be sold at the Minimum Bid Price, even if such number 
of Trading Licenses is less than 1,000. NYSE Market also may choose to 
conduct another auction or auctions and set a new Minimum Bid Price 
(which may be lower than the initial Minimum Bid Price) and NYSE Market 
will not be required to establish a Clearing Price that will result in 
the sale of at least 1,000 Trading Licenses.
    In each auction, NYSE Market will limit the number of Trading 
Licenses that may be bid for by a single member organization to a 
number that is the greater of (i) 35 and (ii) 125% of the number of 
Trading Licenses utilized by that member organization in its business 
immediately prior to the auction.
    Except for the Trading Licenses to be issued for the year in which 
the Merger occurs, each Trading License will be valid for one year. 
Trading Licenses will not be transferable, and may not be assigned, 
sublicensed, or leased, in whole or in part.\199\ Trading Licenses may 
be transferred, however, with the prior written consent of NYSE Market, 
to a qualified and approved member organization that (i) is an 
affiliate of the Trading License holder, or (ii) continues 
substantially the same business of the Trading License holder without 
regard to the form of the transaction used to achieve such continuation 
(e.g., merger, sale of substantially all assets, reincorporation, 
reorganization or similar transaction).
---------------------------------------------------------------------------

    \199\ Accordingly, lease-related provisions of the NYSE 
Constitution will not be carried over and any references to leases 
in the NYSE Rules will be deleted.
---------------------------------------------------------------------------

    During the periods between auctions, NYSE Market will make 
available for sale additional Trading Licenses. The price for Trading 
Licenses sold between auctions will be equal to the auction price of 
the most recent auction, plus a premium of ten percent (10%), with the 
total prorated to reflect the amount of time remaining in the year. 
NYSE Market will not issue in any one year more than 1,366 Trading 
Licenses.
    Trading Licenses will expire at the end of the calendar year for 
which they are issued. However, the holder of a Trading License may 
terminate the license prior to the end of the calendar year by 
providing at least ten days' prior written notice to NYSE Market of 
such termination and paying a termination fee equal to one monthly 
installment of the Trading License Price. In addition, if a Trading 
License holder has ceased to be a member organization of New York Stock 
Exchange LLC for any reason, such holder will be deemed to have 
terminated its Trading License as of the date it ceased to be a member 
organization.
    The NYSE also proposed to establish auction procedures for the 
issuance of Trading Licenses in the year in which the Merger occurs. 
Under proposed NYSE Rule 300T, the first auction will be conducted in 
accordance with the procedures outlined in proposed NYSE Rule 300, 
except that a maximum bid price (``Maximum Bid Price'') also will be 
established. The Minimum Bid Price and Maximum Bid Price will be 80% 
and 120%, respectively, of the average annual lease price for leases 
(including renewal leases), which leases (or renewals) commenced during 
the six-month period ending on the last business day of the last 
calendar month ending at least thirty days before the opening of the 
auction. Trading Licenses issued in such auction will expire at the end 
of the calendar year in which the Merger occurs.
    The Commission observes that the NYSE's proposal makes certain 
modifications to the Dutch auction model that are designed to provide 
that qualified member organizations will have fair access to NYSE 
Market. In particular, the proposed rules restrict the number of 
Trading Licenses that each member organization may bid for in an 
auction to the greater of 35 Trading Licenses and 125% of the Trading 
Licenses used by such member organization in its business immediately 
prior to the auction. In addition, the Dutch auction procedure for 
issuing Trading Licenses requires that the Minimum Bid Price be set at 
a price that is no greater than 80% of the prior year's auction price.
    The proposal also restricts NYSE Market from selecting an auction 
Clearing Price greater than the price

[[Page 11268]]

needed to sell 1,000 Trading Licenses, provided that the Clearing Price 
is at least the Minimum Bid Price. Moreover, the provision that allows 
NYSE Market to sell additional Trading Licenses at a 10% premium from 
the auction price, subject to the overall limitation of 1,366 
outstanding Trading Licenses, will provide new member organizations, 
member organizations that did not bid successfully in the auction, or 
member organizations with a need for additional licenses with the 
opportunity to obtain Trading Licenses outside of the auction.
    The Commission further notes that each Trading License will include 
the rights to electronic and physical access to the trading facilities 
of NYSE Market, which are substantially similar to the access rights of 
current NYSE seat holders and lessees. In addition, the proposal 
provides that the aggregate number of Trading Licenses to be issued in 
any one year will be limited to 1,366, a figure that is equal to the 
number of seats under the NYSE's current structure.
    For the foregoing reasons, the Commission finds that proposed NYSE 
Rules 300 and 300T provide fair access to member organizations with 
respect to the issuance of Trading Licenses by NYSE Market and are 
consistent with the Act and in particular with Sections 6(b)(2) and 
6(b)(5) of the Act.\200\ The Commission believes it would not be 
consistent with the Act and in particular Section 6(b)(5), which 
prohibits the rules of an exchange from unfairly discriminating between 
broker-dealers, to provide information about the auction to one member 
that is not available to all members.
---------------------------------------------------------------------------

    \200\ 15 U.S.C. 78f(b)(2) and 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    In essence, the Dutch auction mechanism for issuing Trading 
Licenses involves the setting of a fee by NYSE Market for member 
organizations seeking access to the facility of an exchange. Thus, the 
proposed rules governing the Dutch auction procedure also must be 
examined in light of the requirement of Section 6(b)(4) of the Act 
\201\ that these rules provide for the equitable allocation of 
reasonable dues, fees, and charges among members and issuers and other 
persons using the NYSE Market. The NYSE asserts that pricing Trading 
Licenses through a Dutch auction will establish a reasonable price 
because the price is determined by the ``market,'' that is, by member 
organizations that wish to obtain Trading Licenses. The NYSE also 
states that the Dutch auction mechanism will allow each member 
organization to determine the price that it is willing to pay for a 
Trading License, subject to the auction procedures. Moreover, the NYSE 
notes that the Dutch auction mechanism for issuance of Trading Licenses 
is not dissimilar from the manner in which access to the NYSE was 
traditionally priced, with supply and demand governing the price at 
which traditional memberships were purchased or leased.
---------------------------------------------------------------------------

    \201\ 15 U.S.C. 78f(b)(4).
---------------------------------------------------------------------------

    The Commission finds that proposed NYSE Rules 300 and 300T are 
consistent with Section 6(b)(4) of the Act.\202\ With respect to the 
price for Trading Licenses that will be sold between auctions, the NYSE 
states that the price for such Trading Licenses is reasonable because 
it is based on the latest actual auction price, but with a 10% premium. 
The NYSE asserts that this premium is necessary to encourage 
participation in the annual auction as a way to promote price and 
quantity discovery in the auction, and also to defray out-of-cycle 
administrative costs. In the Commission's view, the Act does not 
require the NYSE to charge the same fee for Trading Licenses sold 
between auctions as for those licenses sold in the auction. Rather, the 
Act requires that the rules of an exchange provide for an equitable 
allocation of reasonable dues, fees, and other charges among its 
members and issuers and other persons using its facilities. The 
Commission believes that it is reasonable for NYSE Market to impose a 
10% premium for Trading Licenses that are sold between auctions as a 
means to encourage participation in the auction and to help defray 
administrative costs for issuing Trading Licenses outside of the 
auction.
---------------------------------------------------------------------------

    \202\ 15 U.S.C. 78f(b)(4). NYSE Market conducted its first 
auction and announced that following the Merger, it will issue 1,274 
Trading Licenses at a price of $49,290 each. The Commission notes 
that the NYSE cannot issue Trading Licenses at the price established 
by such auction until the Commission approves this proposed rule 
change, as amended. The NYSE represented that, at that time, New 
York Stock Exchange LLC will file a proposed rule change under 
Section 19(b)(1) of the Act to amend its fee schedule to set forth 
the price at which Trading Licenses will be sold in the auction and 
the price at which Trading Licenses will be sold before the next 
auction. The NYSE also represented that New York Stock Exchange LLC 
will file a similar proposed rule change following each subsequent 
annual auction.
---------------------------------------------------------------------------

    The Commission received three comment letters on the Trading 
Licenses proposal.\203\ The IBAC December Letter objected to the NYSE's 
plan to hold the initial Trading License auction on December 20, 
2005.\204\ IBAC argued that, while the results of the initial auction 
would not be effective until the approval of the proposed rule change, 
the exchange's holding the auction prior to the end of the comment 
period contravened the statutory process for proposed rule changes 
under Section 19(b)(1) of the Act. In Amendment No. 5, the NYSE 
disagreed that holding the initial auction prior to the proposal's 
approval would prejudice IBAC's ability to comment. The NYSE stated 
that provisionally conducting the initial auction would give members 
and others increased certainty in planning for post-Merger business and 
also provide the NYSE and the Commission with the opportunity to 
observe whether the auction procedures resulted in a fair and orderly 
pricing of the Trading Licenses and fair access to the facilities of 
the exchange.
---------------------------------------------------------------------------

    \203\ See IBAC December Letter, IBAC February Letter, and SIA/
TBMA Letter, supra note 6.
    \204\ See IBAC December Letter, supra note 6.
---------------------------------------------------------------------------

    The IBAC February Letter claimed that the proposed auction process 
for Trading Licenses could have a significant burden on competition, 
and noted that the NYSE failed to justify this burden in the proposal's 
Form 19b-4.\205\ IBAC asserted that, the proposed rule change, along 
with NYSE's Hybrid Market proposal,\206\ would unfairly disadvantage 
floor brokers and their customers. IBAC also expressed concern that in 
future auctions specialists and large institutional broker-dealers 
could bid for an increasingly higher number of licenses (up to 125% of 
their prior year's allotment) and at higher prices than the prior 
year's auction price. IBAC argued that, as a result, it could be 
difficult for floor brokers to purchase Trading Licenses and compete 
with these larger firms. IBAC recommended that each auction for Trading 
Licenses have both a minimum and maximum bid price set at 20% below and 
above the prior year's auction price, respectively; that existing 
holders be entitled to acquire a Trading License in the following year 
at a price equal to the prior year's clearing price, plus a maximum 20% 
premium; and that stricter bidding limits be imposed to prevent an 
excessive concentration of Trading Licenses by one or more firms over 
time.\207\
---------------------------------------------------------------------------

    \205\ See IBAC February Letter, supra note 6, at 17-19.
    \206\ See SR-NYSE-2004-05.
    \207\ See IBAC February Letter, supra note 6, at 22-23.
---------------------------------------------------------------------------

    The NYSE Response to Comments disputed that the auction procedures 
to price and allocate Trading Licenses would create a burden on 
competition.\208\ The NYSE noted that the IBAC February Letter 
suggested that most IBAC members currently lease seats on the exchange. 
The NYSE pointed out that the competitive

[[Page 11269]]

concerns that the IBAC February Letter raised are similar to the 
competitive risks that floor brokers and other lessees currently face 
in the seat lease market. The NYSE noted that seat leases, like the 
proposed Trading Licenses, are typically one-year contracts and prices 
for these leases are negotiated on an annual basis. The NYSE also noted 
that, under its existing structure, lessees had no assurance that they 
could continue to lease seats or that the price of their leases would 
not increase to a level that would be difficult for them to pay. The 
NYSE noted that to the extent a member organization today expanded its 
number of memberships, there could be economic pressure on the finite 
supply of seats.\209\ The NYSE further contended that, under the 
proposed rule change, floor brokers would have greater protection than 
they currently have, because there would be a limit on the number of 
Trading Licenses that a member organization may bid for in each 
auction.\210\ Finally, the NYSE asserted that the exchange is not 
statutorily compelled to adopt measures like the ones proposed by IBAC 
to protect floor brokers or any other group of users from market 
vicissitudes.\211\
---------------------------------------------------------------------------

    \208\ See NYSE Response to Comments, supra note 7, at 16-18.
    \209\ Id. at 17.
    \210\ Id.
    \211\ Id.
---------------------------------------------------------------------------

    With respect to IBAC's argument that the NYSE's proposed rule 
change would impose burdens on competition and would unfairly 
discriminate against floor brokers, the Commission believes that the 
proposed auction procedures for pricing and allocating Trading Licenses 
are consistent with the Act. In particular, the Commission believes 
that these proposed procedures will provide a fair opportunity for 
floor brokers to acquire Trading Licenses and therefore that such 
procedures are not unfairly discriminatory and will not impose a burden 
on competition not necessary or appropriate in furtherance of the 
purposes of the Act.\212\ In addition, the exchange has represented 
that after each auction it will file with the Commission a proposed 
rule change that sets forth the price for Trading Licenses to be issued 
in the auction and between auctions. Thus, interested persons will have 
the opportunity to comment annually on the fees to be charged, and 
their impact on the ability to compete, for Trading Licenses.
---------------------------------------------------------------------------

    \212\ 15 U.S.C. 78f(b)(5) and 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------

    The SIA/TBMA Letter argued that the NYSE's proposal to offer 
Trading Licenses that provide full access to NYSE Market does not 
provide for fair access by smaller broker-dealers that trade debt 
securities.\213\ The SIA/TBMA Letter noted that the NYSE has submitted 
to the Commission an exemptive request to permit unlisted debt 
securities to be traded on its Automated Bond System. The SIA/TBMA 
Letter contended that the proposed rule change would compel smaller 
debt dealers to either forego direct access to NYSE's Automated Bond 
System or apply for equity trading rights that they do not need. The 
NYSE Response to Comments expressed skepticism that small debt dealers 
currently are paying to own or lease NYSE memberships to access its 
Automated Bond System.\214\ Thus, the NYSE surmised that the SIA/TBMA 
Letter's comments pertained to its pending exemptive application to 
trade unlisted debt securities on its Automated Bond System. The NYSE 
stated that, if NYSE Market ultimately is able to trade unlisted debt 
securities and, as a result, debt-only dealers are interested in direct 
access to the Automated Bond System, NYSE Market likely would be 
interested in determining how direct access can be provided with 
fairness to those debt dealers, NYSE Market, and other participants in 
the market for debt securities.\215\ The NYSE noted that the need for 
direct access to its Automated Bond System has not been an issue for 
smaller debt-only broker-dealers under its current structure and thus 
the Trading License proposal is not deficient with respect to fair 
access by these debt market participants.\216\ The NYSE further stated 
that it may decide in the future to issue separate licenses for 
electronic only access or access limited to particular products. The 
Commission agrees with the NYSE and believes that the NYSE's proposal 
will continue to provide fair access to trading of securities on its 
market, including debt securities.
---------------------------------------------------------------------------

    \213\ See SIA/TBMA Letter, supra note 6, at 20.
    \214\ See NYSE Response to Comments, supra note 7, at 18.
    \215\ Id.
    \216\ Id.
---------------------------------------------------------------------------

G. Listing and Allocation of NYSE Group's or an Affiliate's Securities

    NYSE Group intends to list its shares of common stock for trading 
on New York Stock Exchange LLC. The Commission believes that such 
``self-listing'' raises questions as to an SRO's ability to 
independently and effectively enforce its own and the Commission's 
rules against itself or an affiliated entity, and thus comply with its 
statutory obligations under the Act.\217\ For instance, an SRO might be 
reluctant to vigorously monitor for compliance with its initial and 
continued listing rules by the securities of an affiliated issuer or 
its own securities, and may be tempted to allow its own securities, or 
the securities of an affiliate, to be listed (and continue to be 
listed) on the SRO's market even if the security is not in full 
compliance with the SRO's listing rules. Similar conflicts of interest 
could arise in which the SRO might choose to selectively enforce, or 
not enforce, its trading rules with respect to trading in its own stock 
or that of an affiliate so as to benefit itself.
---------------------------------------------------------------------------

    \217\ See Securities Exchange Act Release Nos. 51123 (February 
2, 2005), 70 FR 6743 (February 8, 2005) (SR-NASD-2004-169), and 
50171 (August 9, 2004), 69 FR 50427 (August 16, 2004) (SR-PCX-2004-
76).
---------------------------------------------------------------------------

    In an effort to minimize any potential conflicts involving the 
listing of its own securities or those of an affiliate (together, 
``Affiliated Securities''), the NYSE has proposed that an Affiliated 
Security may not be approved for listing on New York Stock Exchange LLC 
unless NYSE Regulation finds that such security satisfies New York 
Stock Exchange LLC's rules for listing, and such finding is approved by 
the NYSE Regulation board of directors prior to such listing.\218\ 
However, such proposed procedure will not apply to the initial listing 
of the common stock of NYSE Group because proposed NYSE Rule 497 will 
not be in effect, the Merger will not have closed, and the NYSE 
Regulation board of directors will not have been constituted as 
contemplated in proposed NYSE Rule 497 prior to the time by which the 
initial listing of the NYSE Group common stock must be approved. 
Instead, the initial listing of NYSE Group common stock will be 
reviewed by the regulatory staff of NYSE and approved by the Regulatory 
Oversight Committee of the current board of directors of NYSE, as the 
most logical predecessor to the NYSE Regulation board.\219\ In light of 
these circumstances, the Commission finds that the proposed procedure 
for the initial listing of the NYSE Group common stock is consistent 
with the Act.
---------------------------------------------------------------------------

    \218\ See proposed NYSE Rule 497. In Amendment No. 8, the NYSE 
proposes to clarify that such approval by the NYSE Reguolation board 
of directors must be prior to initial listing.
    \219\ See Notice, supra note 5, at note 38 and accompanying 
text, and proposed NYSE Rule 4971, as included in Amendment No. 8.
---------------------------------------------------------------------------

    To minimize any potential conflicts that could arise relating to 
the selective enforcement, or non-enforcement, of the listing or 
trading rules of New York Stock Exchange LLC with respect to continued 
listing of and trading in any Affiliated Security, the NYSE has

[[Page 11270]]

proposed to prepare and send to the Commission a quarterly report 
summarizing NYSE Regulation's monitoring of an Affiliated Security's 
compliance with listing standards and its monitoring of trading in such 
securities.\220\ The NYSE has proposed that any notification of lack of 
compliance with any applicable listing standard from NYSE Regulation to 
NYSE Group or an affiliate, and any corresponding plan of compliance, 
must be reported to the Commission.\221\ Proposed NYSE Rule 497(d) also 
will require an annual audit of compliance by NYSE Group or the 
affiliated issuer with the listing standards by an independent 
accounting firm. The Commission believes that the proposed procedures 
for monitoring of the listing of and trading in Affiliated Securities 
are consistent with the Act.
---------------------------------------------------------------------------

    \220\ See proposed NYSE Rule 497(c).
    \221\ See proposed NYSE Rule 497(c)(3).
---------------------------------------------------------------------------

    In addition, the NYSE proposes to amend NYSE Rule 103B, the 
Allocation Policy, with respect to the allocation of NYSE Group stock 
to (i) give NYSE Group the right to determine the number and identity 
of specialist firms that will be included in the group from which it 
shall choose its specialist, provided the group consists of at least 
four specialist firms, and (ii) provide NYSE Group with the same 
material with respect to each specialist firm applicant as would have 
been reviewed by the Allocation Committee in allocating other 
securities. All other aspects of the policy will continue to apply. The 
NYSE stated in the Notice, that it expects that the independent 
directors of NYSE Group will select the specialist for NYSE Group 
common stock.\222\ The NYSE also stated in the Notice that it proposed 
this change to the Allocation Policy in recognition of the special 
circumstances involved in determining which of its specialist firms 
will be the specialist for the NYSE Group's stock. The Commission finds 
this proposed rule change is consistent with the Act.
---------------------------------------------------------------------------

    \222\ See Notice, supra note 5, at 2094.
---------------------------------------------------------------------------

H. Regulatory Funding

    The NYSE has identified several different sources of revenue for 
its regulatory program. An exchange has the authority to assess its 
members to cover its costs of regulation, subject to the requirements 
of the Act. New York Stock Exchange LLC has delegated this authority to 
NYSE Regulation with respect to regulatory and certain other fees. 
Subject to Commission approval, NYSE Regulation will determine, assess, 
collect, and retain examination, access, registration, qualification, 
continuing education, arbitration, dispute resolution, and other 
regulatory fees. The NYSE has represented that NYSE Regulation expects 
to continue to fund its examination programs for assuring financial 
responsibility and compliance with sales practice rules, testing, and 
continuing education through fees assessed directly on member 
organizations.
    NYSE Regulation also will receive funding independently from the 
markets for which it will provide regulatory services. The NYSE has 
represented the services agreement between NYSE Regulation and the 
Pacific Exchange will ensure the provision of adequate funding to NYSE 
Regulation to carry out the regulatory services it will provide to the 
Pacific Exchange. In addition, the NYSE has represented that there will 
be an explicit agreement among NYSE Group, New York Stock Exchange LLC, 
NYSE Market, and NYSE Regulation to provide adequate funding to NYSE 
Regulation.\223\
---------------------------------------------------------------------------

    \223\ See Amendment No. 6, supra note 8.
---------------------------------------------------------------------------

    One commenter questions whether NYSE Regulation will have to 
generate sufficient sanctions and penalties to fund its own operations, 
or, alternatively, whether NYSE Group and New York Stock Exchange LLC 
will be willing to adequately fund NYSE Regulation's expenses without 
regard to the impact on NYSE Group's ``bottom line.'' \224\ This 
commenter does not believe that the undertaking by the NYSE that there 
will be an explicit agreement among NYSE Group, New York Stock Exchange 
LLC, NYSE Market, and NYSE Regulation to provide adequate funding for 
NYSE Regulation is sufficient.\225\ Another commenter believes that the 
governing documents of NYSE Regulation should explicitly provide the 
sources of its funding.\226\
---------------------------------------------------------------------------

    \224\ IBAC February Letter, supra note 6, at 5.
    \225\ Id. at 6.
    \226\ SIA/TBMA Letter, supra note 6, at 25.
---------------------------------------------------------------------------

    The Commission notes that SROs are required to enforce their own 
rules and the federal securities laws against their members, and that 
any disciplinary action taken by an SRO (including the assessment of a 
fine or penalty) must be done in compliance with its rules as approved 
by the Commission. The Commission also notes that a member has a right 
of appeal of a disciplinary determination by its SRO to the 
Commission.\227\ In addition, as noted above, NYSE Regulation has been 
delegated the authority to raise revenue through member and regulatory 
fees.\228\ The NYSE states that, as is currently the case, a large 
portion of NYSE Regulation's revenues will continue to be derived from 
member fees paid as a percentage of gross revenues.\229\ The Commission 
does not believe that the absence of specificity in an exchange's rules 
regarding regulatory funding precludes the Commission from finding that 
the exchange is so organized and has the capacity to be able to carry 
out the purposes of the Act and to comply, and to enforce compliance by 
its members and persons associated with its members, with the 
provisions of the Act, the rules and regulations thereunder, and the 
rules of the exchange.\230\ The Commission finds that the proposed 
funding of NYSE Regulation's regulatory responsibilities, which 
includes the assessment of member and other fees, as well as funding 
from other entities for which NYSE Regulation will be providing 
regulatory services, is designed to provide sufficient funding to NYSE 
Regulation to enable it and New York Stock Exchange LLC to carry out 
their responsibilities consistent with the Act.\231\
---------------------------------------------------------------------------

    \227\ Section 19(d)(2) of the Act, 15 U.S.C. 78s(d)(2).
    \228\ New York Stock Exchange LLC will be prohibited from using 
any regulatory fees, fines, or penalties for commercial purposes, 
and NYSE Regulation may not distribute such funds to NYSE Group or 
any entity other than NYSE Regulation. See supra note 144 and 
accompanying text.
    \229\ NYSE Response to Comments, supra note 7, at 10.
    \230\ The issue of what further steps, if any, should be taken 
with respect to transparency of an exchange's regulatory revenues 
and expenses is part of a Commission proposal relating to SRO 
governance and administration, and is better addressed in the 
context of the larger proposal. See Securities Exchange Act Release 
No. 50699 (November 18, 2004), 69 FR 71126 (December 8, 2004) (``SRO 
Governance Proposal'').
    \231\ The NYSE represents that no provision of this proposed 
rule change, including any grant of authority from New York Stock 
Exchange LLC to NYSE Regulation to assess, collect, and retain 
regulatory fees, fines, or penalties, or any limitation on the use 
by NYSE Regulation of such regulatory monies, will prohibit NYSE 
Regulation from making charitable donations if its board of 
directors determines such donations would be consistent with its and 
New York Stock Exchange LLC's obligations under the Act. The NYSE 
also represents that, in the future, it will file with the 
Commission a proposed rule change as to NYSE Regulation's use of 
regulatory fees, fines, and penalties. Telephone conversation 
between Richard P. Bernard, Executive Vice President and General 
Counsel, NYSE, and Elizabeth K. King, Associate Director, Division, 
Commission, on February 27, 2006.
---------------------------------------------------------------------------

I. Options Trading Rights

    The Commission received a comment letter on the proposed rule 
change from a group of individuals who own NYSE Option Trading Rights 
(``OTRs'') that are separate from full NYSE seat ownership

[[Page 11271]]

(``Separated OTRs'').\232\ These commenters argue that they held on to 
their Separated OTRs, even after the NYSE exited the options business 
in 1997, with the expectation that their ownership of the Separated 
OTRs would afford them full rights to trade options under the auspices 
of the NYSE or its successor entity. They now argue that such ownership 
does, and should continue to after the Merger, give them such right.
---------------------------------------------------------------------------

    \232\ See OTR Investors Letter, supra note 6. See also OTR 
Investors Letter II, supra note 6, filed in response to the NYSE 
Response to Comments.
---------------------------------------------------------------------------

    The NYSE has not traded options since 1997, when the Commission 
approved the transfer of NYSE's options business to the Chicago Board 
Options Exchange, Incorporated (``CBOE'').\233\ At that time, the NYSE 
and CBOE put in place a program to provide certain persons that traded 
options on the NYSE with trading permits to trade options on CBOE. 
Benefits from the leasing of the CBOE options trading permits not so 
issued (``lease pool'') were distributed to a group of approximately 92 
persons that owned OTRs.\234\ The CBOE trading permits and lease pool 
had a duration of seven years. The Commission found the 1997 proposal 
to be consistent with the Act, noting that there is nothing in the Act 
that compels the NYSE to continue to trade a particular product line 
and the NYSE was free to terminate its options business entirely (in 
which case OTR holders would not have received any lease 
payments).\235\
---------------------------------------------------------------------------

    \233\ See Securities Exchange Act Release No. 38542 (April 23, 
1997), 62 FR 23521 (April 30, 1997).
    \234\ Holders of Separated OTRs were included in this group, and 
were allowed to participate in the lease pool without surrendering 
their OTRs.
    \235\ See Securities Exchange Act Release No. 38542 (April 23, 
1997), 62 FR 23521 (April 30, 1997).
---------------------------------------------------------------------------

    It has been over eight years since the NYSE operated an options 
business. The Commission notes, as do the OTR investors in their 
comment letter, that holders of Separated OTRs do not have any 
membership vote and do not have ownership in the assets of the NYSE. As 
a result, the Commission finds it is consistent with Section 6(b)(1) of 
the Act \236\ and the NYSE's rules for the NYSE to eliminate its rules 
that provide for options trading rights.
---------------------------------------------------------------------------

    \236\ 15 U.S.C. 78f(b)(1).
---------------------------------------------------------------------------

J. Market Data

    One commenter raises a concern about the market data function of 
the NYSE being within the control of a for-profit entity.\237\ This 
commenter believes that all market data fees should be cost-based and 
that market data revenue should not be used to cross-subsidize the 
costs of regulation, and that a for-profit entity may be motivated to 
engage in profit-motivated market data pricing.\238\ The Commission 
notes that the fees charged for consolidated market data (i.e., the 
``top-of-book'' quotations of SROs and all reported trades) are 
established by the joint SRO plans that govern the collection, 
consolidation, and dissemination of such market data, and that all such 
fees must be filed with the Commission pursuant to the Act. In 
addition, ``depth-of-book'' quotations can be disseminated by all SROs, 
as well as non-SRO entities, such as ATSs.\239\ The question of what 
steps, if any, should be taken by the Commission to address the level 
and use of market data revenue, as well as transparency of regulatory 
revenue and expenses, is part of a larger Commission review of the 
self-regulatory structure of our markets, and is better addressed in 
the context of this larger review.\240\
---------------------------------------------------------------------------

    \237\ See SIA/TBMA Letter, supra note 6, at 19.
    \238\ Id. The commenter believes that tying market data fees to 
the cost of producing the data, while keeping costs of regulation 
separate, will enable full and transparent funding of regulation 
without overcharging for market data. Id.
    \239\ The NYSE notes in its response to comments that each of 
the members of Consolidated Tape Association can compete with the 
NYSE (and each other) by providing its own depth-of-book data. NYSE 
Response to Comments, supra note 7, at 19.
    \240\ See Concept Release Concerning Self-Regulation, supra note 
26. See also SRO Governance Proposal, supra note 230.
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III. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change, as amended, 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 
\241\ that the proposed rule change (SR-NYSE-2005-77), as amended, is 
approved, and Amendment Nos. 6 and 8 are approved on an accelerated 
basis.
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    \241\ 15 U.S.C. 78s(b)(2).
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    It is therefore further ordered, pursuant to Section 11A(b)(1) of 
the Act, that NYSE Market shall be exempt from registration as a 
securities information processor for a period of thirty (30) days 
following the date of closing of the Merger.
    It is therefore further ordered, pursuant to Section 11A(b)(1) of 
the Act, that upon the filing by NYSE Market of an application for 
registration or an exemption from registration as a securities 
information processor within the 30-day period prescribed above, NYSE 
Market shall be exempt from registration as a securities information 
processor for an additional period of ninety (90) days following the 
end of the original 30-day period.

    By the Commission (Chairman Cox and Commissioners Glassman, 
Atkins, Campos, and Nazareth).
Nancy M. Morris,
Secretary.
[FR Doc. 06-2033 Filed 3-3-06; 8:45 am]

BILLING CODE 8010-01-P