[Federal Register: October 5, 2007 (Volume 72, Number 193)]
[Notices]
[Page 57083-57085]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr05oc07-89]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-56581; File No. SR-NASDAQ-2007-068]
Self-Regulatory Organizations; The NASDAQ Stock Market, LLC;
Notice of Filing of Proposed Rule Change, as Modified by Amendment No.
1 Thereto, To Amend the Limited Liability Company Agreement of The
NASDAQ Stock Market, LLC
September 28, 2007.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on July 20, 2007, The NASDAQ Stock Market, LLC (``Nasdaq'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared substantially by Nasdaq.
On September 26, 2007, Nasdaq filed Amendment No. 1 to the proposed
rule change. The Commission is publishing this notice to solicit
comments on the proposed rule change, as amended, from interested
persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Nasdaq proposes to amend its Limited Liability Company Agreement
(``LLC Agreement''). Nasdaq will implement the proposed rule change
immediately upon approval by the Commission. The text of the proposed
rule change is available at Nasdaq's Web site http://nasdaq.complinet.com
, at Nasdaq, and at the Commission's Public
Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, Nasdaq included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. Nasdaq has prepared summaries, set forth in Sections A,
B, and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
Nasdaq is modifying its LLC Agreement (including its By-Laws, which
are a part of the LLC Agreement) to adopt a range of enhancements and
clarifications. First, Nasdaq is amending the procedures for election
of Member Representative Directors. Section 6(b)(3) of the Act \3\
requires a national securities exchange to establish rules that assure
a fair representation of its members in the selection of its directors.
To address this requirement, the LLC Agreement provides that twenty
percent of Nasdaq's directors are selected through direct election by
Nasdaq's members. Under the current By-Laws, a slate of candidates is
nominated by a Member Nominating Committee composed of registered
representatives of Nasdaq members. In addition, there is a petition
process through which Nasdaq members may nominate alternate candidates.
The Nasdaq Board establishes a Record Date \4\ and an Election Date,\5\
and provides notice of both dates through a communication to members
that also includes the List of Candidates \6\ developed through the
nomination and petition process. After receiving the notice, firms that
were Nasdaq members on the Record Date are entitled to cast ballots at
any time prior to 5 pm on the Election Date. The candidates receiving
the most votes are then elected to the open positions.
---------------------------------------------------------------------------
\3\ 15 U.S.C. 78f(b)(3).
\4\ Article I(aa) of Nasdaq's current By-Laws defines ``Record
Date'' as a date selected by the Board for the purpose of
determining the Nasdaq Members entitled to vote for the election of
Member Representative Directors on an Election Date.
\5\ Article I(j) of Nasdaq's current By-Laws defines ``Election
Date'' as a date selected by the Board for the election of Member
Representative Directors.
\6\ Article I(o) of Nasdaq's current By-Laws defines ``List of
Candidates'' as the list of candidates for Member Representative
Director positions to be elected by Nasdaq Members on an Election
Date.
---------------------------------------------------------------------------
Nasdaq held its first election of Member Representative Directors
in January 2007, and although the election concluded successfully,
Nasdaq faced some difficulty in educating members about the purpose of
the election and the desirability of participating. Notably, many
members were not interested in voting and therefore Nasdaq had to
retain the services of a proxy solicitation firm to obtain a quorum,
and only obtained the quorum in the days immediately prior to the
Election Date. In reviewing the experience of the first election
process, Nasdaq has noted that the New York Stock Exchange, LLC, the
primary U.S. exchange subsidiary of NYSE Euronext, has a similar
nomination process for a percentage of its directors, but conducts a
direct member election only if there is a contested election (i.e., if
there is more than one candidate for a particular Board seat).\7\
Accordingly, Nasdaq proposes to adopt a comparable limit on the use of
the direct member election.
---------------------------------------------------------------------------
\7\ See Second Amended and Restated Operating Agreement of New
York Stock Exchange LLC at http://www.nyse.com/pdfs/SecondAmendedandRestatedOperatingAgreementofNewYorkStockExchangeLLC.pdf
.
---------------------------------------------------------------------------
As amended, the election process would work as follows: On an
annual basis, the Member Nominating Committee would nominate a slate of
candidates. Although the Member Nominating Committee would have
authority to nominate a number of candidates in excess of the number of
Board seats up for election, the Member Nominating Committee would
likely nominate a number of candidates equal to the number of seats. At
about the same time, the Nasdaq Board would determine the Election Date
and the Record Date.\8\ Promptly after selection of the Election Date,
Nasdaq would distribute (via regular mail and/or e-mail) and post on
its Web site a Notice to Members (i) announcing the Election Date and
the List of Candidates, and (ii) describing the procedures for Nasdaq
Members to nominate candidates for election at the next annual meeting.
The process and timeframes for members to nominate additional
candidates for election would be the same as provided under the current
By-Laws. If, by the date on which a Nasdaq member may no longer submit
a timely nomination, there is only one candidate for each Member
Representative Director seat, the Member Representative Directors would
be elected by The Nasdaq Stock Market, Inc., Nasdaq's sole ``member''
within the meaning of the Delaware Limited Liability Company Act,
directly from the list of candidates nominated by the Member Nominating
Committee. If, however, there is more than one candidate for a seat
(i.e., if there is a contested election), the full list of candidates
will be submitted for a member vote, just as it is under the
[[Page 57084]]
current By-Laws. These proposed changes will be effected through
amendments to Articles I and II of the By-Laws of the LLC Agreement.\9\
Nasdaq is also amending Article II, Section 2 to provide that in the
event of a contested election, votes may be cast until 11:59 p.m.
(rather than 5 p.m.) on the Election Date.
---------------------------------------------------------------------------
\8\ As amended, Article I(aa) of Nasdaq's By-Laws would define
``Record Date'' as a date selected by the Board for the purpose of
determining the Nasdaq Members entitled to vote for the election of
Member Representative Directors on an Election Date in the event of
a Contested Election.
\9\ A portion of the LLC Agreement is denominated as the ``By-
Laws'' because of the similarity of its subject matter to corporate
by-laws. Under Delaware law, however, the By-Laws are part of the
same governing document as the rest of the LLC Agreement.
---------------------------------------------------------------------------
Second, Nasdaq proposes to amend the LLC Agreement to remove out-
of-date references to its initial directors and officers and to its
transition to commencing operations as a national securities exchange.
Specifically, Nasdaq is amending Sections 9(a) and 10 of the LLC
Agreement and Article I of the By-Laws to remove references to initial
officers and directors; deleting Schedules C and D of the LLC
Agreement, which listed the initial officers and directors; and
deleting Section 29, which governed the transitional period between the
formation of Nasdaq and its commencing operations as a national
securities exchange.\10\ Nasdaq also proposes to amend Section 9(a) of
the LLC Agreement to clarify that at least 20% of Nasdaq's directors
shall be Member Representative Directors. The change serves to clarify
that in a circumstance where the Board opted to reduce its size after
the resignation of a Director other than a Member Representative
Director, it would not be required to remove previously elected Member
Representative Directors in order to maintain the percentage of Member
Representative Directors at precisely 20%.
---------------------------------------------------------------------------
\10\ Up-to-date information regarding the current directors of
Nasdaq and its parent corporation, The Nasdaq Stock Market, Inc., is
maintained at http://ir.nasdaq.com/directors.cfm (with a link
provided from http://www.nasdaq.com). As provided by Rule 6a-2 under the
Act, 17 CFR 240.6a-2, Nasdaq certifies that information regarding
the officers of Nasdaq is kept up to date and is available to the
Commission and the public upon request, and is filed with the
Commission as an amendment to Form 1 every three years.
---------------------------------------------------------------------------
Third, Nasdaq proposes to amend Section 27 of the LLC Agreement and
Article VIII, Section 1 of the By-Laws in the LLC Agreement to provide
that amendments to the LLC Agreement (including the By-Laws) must be
approved by the Nasdaq Board and also reflected in a written agreement
executed by The Nasdaq Stock Market, Inc., as sole member of Nasdaq
within the meaning of the Delaware Limited Liability Company Act. The
former requirement reflects the LLC Agreement's status as a rule of
Nasdaq, while the latter requirement reflects Delaware law.\11\
---------------------------------------------------------------------------
\11\ Changes to the LLC Agreement also require a filing pursuant
to Section 19(b) of the Act.
---------------------------------------------------------------------------
Fourth, Nasdaq proposes to amend the compositional requirements of
the Quality of Markets Committee (the ``QMC'') in Article III, Section
6 of the By-Laws to provide that the number of Non-Industry members of
the QMC must equal or exceed the number of Industry members. The
current By-Law requires that QMC must be equally balanced between
Industry and Non-Industry members. This change is consistent with
certain undertakings made by Nasdaq with regard to the composition of
this committee.\12\
---------------------------------------------------------------------------
\12\ See Letter from Edward S. Knight, Executive Vice President,
General Counsel, and Chief Regulatory Officer, Nasdaq, to Robert
L.D. Colby, Acting Director, Division of Market Regulation,
Commission (January 11, 2006) (affirming that Nasdaq shall comply
with certain undertakings in a 1996 Order of the Commission); In the
Matter of National Association of Securities Dealers, Inc., Order
Instituting Public Proceedings Pursuant to Section 19(h)(1) of the
Securities Exchange Act of 1934, Making Findings, and Imposing
Remedial Sanctions, Securities Exchange Act Release No. 37538
(August 8, 1996) (the ``NASD Order'') (requiring ``at least fifty
percent independent public and non-industry membership'' in the QMC)
(emphasis added).
---------------------------------------------------------------------------
Fifth, Nasdaq proposes to amend the compositional requirements of
the Arbitration and Mediation Committee (the ``Arbitration Committee'')
in Article III, Section 6 of the By-Laws to provide that the size of
the committee shall be between 3 and 10 members (rather than 10 to 25
members, as currently required). Because NASD manages an arbitration
and mediation program for use of Nasdaq members pursuant to a
regulatory services agreement between Nasdaq and NASD, Nasdaq has
appointed the members of NASD's Arbitration and Mediation Committee
also to serve on Nasdaq's committee. Because the role of Nasdaq's
committee is minimized by the overlap between Nasdaq's and NASD's
arbitration rules and the role of NASD in administering the program,
Nasdaq believes that a smaller Nasdaq committee would be more
appropriate. Nasdaq would still expect to designate members of the NASD
committee for service on its committee, and the committee would
continue to comply with the balance requirements in the current By-
Laws.\13\
---------------------------------------------------------------------------
\13\ See NASD Order, supra note 12, (requiring ``at least fifty
percent independent public and non-industry membership'' in the
Arbitration Committee).
---------------------------------------------------------------------------
Sixth, Nasdaq proposes to amend the compositional requirements of
the Nasdaq Review Council (the ``NRC'') in Article VI of the By-Laws to
provide that the size of the NRC shall be between 8 and 12 members
(rather than 12 to 14). The NRC is an appellate body empowered to
review disciplinary decisions under Nasdaq rules. Because Nasdaq and
NASD are parties to an agreement under Rule 17d-2 of the Act \14\ that
allocates responsibility to NASD for enforcing a wide range of common
rules with respect to common members, the caseload of the NRC is likely
to be considerably lower than that of the NASD's comparable committee,
the National Adjudicatory Council. Accordingly, Nasdaq believes that a
smaller size for the NRC will be consistent with the efficient
discharge of its responsibilities. Nasdaq is also proposing an
amendment to allow NRC members to serve two consecutive three-year
terms. A comparable provision is in effect for Nasdaq's other appellate
review body, the Nasdaq Listing and Hearing Review Council.
---------------------------------------------------------------------------
\14\ 17 CFR 240.17d-2.
---------------------------------------------------------------------------
Seventh, pursuant to requests made by Commission staff at the end
of Nasdaq's exchange registration process, Nasdaq is amending Article
IX, Section 1 of the By-Laws (i) to include an explicit reference to
the authority of the Nasdaq Board to adopt rules relating to
arbitration between members and between members and customers or
others, and (ii) to delete a sentence that might be construed to
contain an excessively broad description of the authority of the Nasdaq
Board with respect to the operation of Nasdaq rules.\15\
---------------------------------------------------------------------------
\15\ Nasdaq notes that the deletion of a reference to the
Board's authority to issue exemptions from Nasdaq rules should not
be construed to limit Nasdaq's authority under rules that, by their
terms, explicitly authorize waivers or exemptions. See, e.g., Nasdaq
Rules 1070 and 4510.
---------------------------------------------------------------------------
Finally, Nasdaq is amending Article III, Sections 2 and 5, and
Article VIII, Section 2 of the By-Laws to correct typographical errors.
2. Statutory Basis
Nasdaq believes that the proposed rule change is consistent with
the provisions of Section 6 of the Act,\16\ in general, and with
Section 6(b)(3) and (b)(5) of the Act,\17\ in particular, in that the
proposal is designed to assure a fair representation of Nasdaq members
in the selection of its directors, and to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, to foster cooperation and coordination with
persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
securities, to remove impediments to
[[Page 57085]]
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. Nasdaq believes that the changes will materially enhance the
efficiency of its governance processes while continuing to ensure a
fair representation of its members in the selection of its directors.
---------------------------------------------------------------------------
\16\ 15 U.S.C. 78f.
\17\ 15 U.S.C. 78f(b)(3) and (5).
---------------------------------------------------------------------------
B. Self-Regulatory Organization's Statement on Burden on Competition
Nasdaq does not believe that the proposed rule change will result
in any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act, as amended.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve such proposed rule change, or
(B) Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or Send an e-mail to rule-comments@sec.gov. Please include
File Number SR-NASDAQ-2007-068 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-NASDAQ-2007-068. This
file number should be included on the subject line if e-mail is used.
To help the Commission process and review your comments more
efficiently, please use only one method. The Commission will post all
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml
). Copies of the submission, all subsequent amendments,
all written statements with respect to the proposed rule change that
are filed with the Commission, and all written communications relating
to the proposed rule change between the Commission and any person,
other than those that may be withheld from the public in accordance
with the provisions of 5 U.S.C. 552, will be available for inspection
and copying in the Commission's Public Reference Room, 100 F Street,
NE., Washington, DC 20549, on official business days between the hours
of 10 am and 3 pm. Copies of such filing also will be available for
inspection and copying at the principal office of Nasdaq. All comments
received will be posted without change; the Commission does not edit
personal identifying information from submissions. You should submit
only information that you wish to make available publicly. All
submissions should refer to File Number SR-NASDAQ-2007-068 and should
be submitted on or before October 26, 2007.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\18\
---------------------------------------------------------------------------
\18\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Nancy M. Morris,
Secretary.
[FR Doc. E7-19672 Filed 10-4-07; 8:45 am]
BILLING CODE 8011-01-P