[Federal Register: November 29, 2005 (Volume 70, Number 228)]
[Notices]
[Page 71592-71595]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr29no05-117]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-52811; File No. SR-PCX-2005-125]
Self-Regulatory Organizations; Pacific Exchange, Inc.; Notice of
Filing and Order Granting Accelerated Approval of Proposed Rule Change
To Extend Certain Exceptions From the Voting and Ownership Limitations
in the Certificate of Incorporation of PCX Holdings, Inc.
November 21, 2005.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on November 15, 2005, the Pacific Exchange, Inc. (``PCX'' or the
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I and
II below, which Items have been prepared by PCX. The Commission is
publishing this notice to solicit comments on the proposed rule change
from interested persons, and is approving the proposal on an
accelerated basis.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
PCX hereby submits to the Commission a proposed rule change to
extend certain exceptions from the voting and ownership limitations in
the certificate of incorporation of PCX Holdings, Inc. (``PCXH''), a
Delaware corporation and the parent company of PCX, approved by the
Commission in an order issued on September 22, 2005,\3\ so as to allow
Archipelago Holdings, Inc. (``Archipelago''), a Delaware corporation
and the ultimate parent company of PCXH and PCX, to continue to (i) own
and operate the ATS OTC Function (as defined below) of its wholly-owned
subsidiary, Archipelago Trading Services, Inc. (``Arca Trading''), and
(ii) until the closing of the proposed business combination of
Archipelago and the New York Stock Exchange, Inc. (the ``NYSE''), a New
York not-for-profit corporation (the ``Proposed Archipelago NYSE
Merger''), own and operate the DOT Function (as defined below) of its
wholly-owned subsidiary, Archipelago Securities, L.L.C. (``Archipelago
Securities'').
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\3\ See Securities Exchange Act Release No. 52497 (September 22,
2005), 70 FR 56949 (September 29, 2005) (``Order Approving SR-PCX-
2005-90'').
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II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, PCX included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item III below. The self-regulatory organization has prepared
summaries, set forth in sections A, B and C below, of the most
significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
a. PCXH Acquisition and the Amendment of the PCXH Certificate of
Incorporation
On September 26, 2005, Archipelago completed its acquisition of
PCXH and all of its wholly-owned subsidiaries, including PCX and PCX
Equities, Inc. (``PCXE'') (the ``PCXH Acquisition''). The PCXH
Acquisition was accomplished by way of a merger of PCXH with a wholly-
owned subsidiary of Archipelago, with PCXH being the surviving
corporation in the merger and becoming a wholly-owned subsidiary of
Archipelago.
The certificate of incorporation of PCXH (as amended to date, the
``PCXH Certificate of Incorporation'') contains various ownership and
voting restrictions on PCXH's capital stock, which are designed to
safeguard the independence of the self-regulatory functions of PCX and
to protect the Commission's oversight responsibilities. In order to
allow Archipelago to own 100% of the capital stock of PCXH, prior to
the completion of the PCXH Acquisition, PCX filed with the Commission a
proposed rule change which sought to, among other things, amend the
PCXH Certificate of Incorporation to create an exception from the
voting and ownership restrictions for Archipelago and certain of its
related persons (the ``Original Rule Filing'').\4\ The Original Rule
Filing, as amended by Amendment No. 1 and Amendment No. 2 thereto, was
approved by the Commission on September 22, 2005 \5\ and the amended
PCXH Certificate of Incorporation became effective on September 26,
2005, upon the closing of the PCXH Acquisition.
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\4\ See Pacific Exchange, Inc., Proposed Rule Change Relating to
the Certificate of Incorporation of PCX Holdings, Inc., PCX Rules,
and Bylaws of Archipelago Holdings, Inc., File No. SR-PCX-2005-90
(August 1, 2005).
\5\ See Order Approving SR-PCX-2005-90.
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Article Nine of the PCXH Certificate of Incorporation provides that
no Person,\6\ either alone or together with its Related Persons,\7\ may
own, directly or indirectly, shares constituting more than 40% of the
outstanding shares of any class of PCXH capital stock,\8\ and that no
Person, either alone or together with its Related Persons who is a
trading permit holder of PCX or an equities trading permit holder of
PCXE, may own, directly or indirectly, shares
[[Page 71593]]
constituting more than 20% of any class of PCXH capital stock.\9\
Furthermore, the PCXH Certificate of Incorporation provides that, for
so long as PCXH controls, directly or indirectly, PCX, no Person,
either alone or with its Related Persons, may directly or indirectly
vote or cause the voting of shares of PCXH capital stock or give any
proxy or consent with respect to shares representing more than 20% of
the voting power of the issued and outstanding PCXH capital stock.\10\
The PCXH Certificate of Incorporation also places limitations on the
right of any Person, either alone or with its Related Persons, to enter
into any agreement with respect to the withholding of any vote or
proxy.\11\
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\6\ ``Person'' is defined to mean an individual, partnership
(general or limited), joint stock company, corporation, limited
liability company, trust or unincorporated organization, or any
governmental entity or agency or political subdivision thereof. PCXH
Certificate of Incorporation, Article Nine, section 1(b)(iv).
\7\ The term ``Related Person,'' as defined in the PCXH
Certificate of Incorporation, means (i) with respect to any person,
all ``affiliates'' and ``associates'' of such person (as such terms
are defined in Rule 12b-2 under the Act; (ii) with respect to any
person constituting a trading permit holder of PCX or an equities
trading permit holder of PCXE, any broker dealer with which such
holder is associated; and (iii) any two or more persons that have
any agreement, arrangement or understanding (whether or not in
writing) to act together for the purpose of acquiring, voting,
holding or disposing of shares of the capital stock of PCXH. PCXH
Certificate of Incorporation, Article Nine, section 1(b)(iv).
\8\ PCXH Certificate of Incorporation, Article Nine, section
1(b)(i). However, such restriction may be waived by the Board of
Directors of PCXH pursuant to an amendment to the Bylaws of PCXH
adopted by the Board of Directors, if, in connection with the
adoption of such amendment, the Board of Directors adopts a
resolution stating that it is the determination of such Board that
such amendment will not impair the ability of PCX to carry out its
functions and responsibilities as an ``exchange'' under the Act and
is otherwise in the best interests of PCXH and its stockholders and
PCX, and will not impair the ability of the Commission to enforce
said Act, and such amendment shall not be effective until approved
by said Commission; provided that the Board of Directors of PCXH
shall have determined that such Person and its Related Persons are
not subject to any applicable ``statutory disqualification'' (within
the meaning of section 3(a)(39) of the Act). PCXH Certificate of
Incorporation, Article Nine, sections 1(b)(i)(B) and 1(b)(i)(C).
\9\ PCXH Certificate of Incorporation, Article Nine, section
1(b)(ii).
\10\ PCXH Certificate of Incorporation, Article Nine, section
1(c).
\11\ Id.
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PCX proposed (and the Commission approved) an exception from the
ownership and voting limitations described above by adding a new
paragraph at the end of Article Nine of the PCXH Certificate of
Incorporation, which provides that for so long as Archipelago directly
owns all of the outstanding capital stock of PCXH, these ownership and
voting limitations shall not be applicable to the ownership and voting
of shares of PCXH by (i) Archipelago, (ii) any Person that is a Related
Person of Archipelago, either alone or together with its Related
Persons, and (iii) any other Person to which Archipelago is a Related
Person, either alone or together with its Related Persons.\12\ These
exceptions to the ownership and voting limitations, however, shall not
apply to any ``Prohibited Persons,'' \13\ which is defined to mean any
Person that is, or that has a Related Person that is (i) an OTP Holder
or an OTP Firm (as defined in the rules of PCX) \14\ or (ii) an ETP
Holder (as defined in the rules of PCXE),\15\ unless such Person is
also a ``Permitted Person'' under the PCXH Certificate of
Incorporation.\16\ The PCXH Certificate of Incorporation further
provides that any Prohibited Person not covered by the definition of a
Permitted Person who is subject to and exceeds the voting and ownership
limitations imposed by Article Nine as of the date of the closing of
the PCXH Acquisition shall be permitted to exceed the voting and
ownership limitations imposed by Article Nine only to the extent and
for the time period approved by the Commission.\17\
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\12\ PCXH Certificate of Incorporation, Article Nine, Section 4.
\13\ Id.
\14\ PCX rules define an ``OTP Holder'' to mean any natural
person, in good standing, who has been issued an Options Trading
Permit (``OTP'') by the Exchange for effecting approved securities
transactions on the Exchange's trading facilities, or has been named
as a Nominee. PCX Rule 1.1(q). The term ``Nominee'' means an
individual who is authorized by an ``OTP Firm'' (a sole
proprietorship, partnership, corporation, limited liability company
or other organization in good standing who holds an OTP or upon whom
an individual OTP Holder has conferred trading privileges on the
Exchange's trading facilities) to conduct business on the Exchange's
trading facilities and to represent such OTP Firm in all matters
relating to the Exchange. PCX Rule 1.1(n).
\15\ PCXE rules define an ``ETP Holder'' to mean any sole
proprietorship, partnership, corporation, limited liability company
or other organization in good standing that has been issued an
Equity Trading Permit, a permit issued by the PCXE for effecting
approved securities transactions on the trading facilities of PCXE.
PCXE Rule 1.1(n).
\16\ ``Permitted Person'' is defined to mean (A) any broker or
dealer approved by the Commission after June 20, 2005 to be a
facility (as defined in Section 3(a)(2) of the Act) of PCX; (B) any
Person that has been approved by the Commission prior to it becoming
subject to the provisions of Article Nine of the PCXH Certificate of
Incorporation with respect to the voting and ownership of shares of
PCXH capital stock by such Person; and (C) any Person that is a
Related Person of Archipelago solely by reason of beneficially
owning, either alone or together with its Related Persons, less than
20% of the outstanding shares of Archipelago capital stock. PCXH
Certificate of Incorporation, Article Nine, section 4.
\17\ Id.
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b. ATS OTC Function
Arca Trading is a broker-dealer and an ETP Holder of PCXE. The
business of Arca Trading includes, among other things, the operation of
an alternative trading system (``ATS'') (as defined in Regulation ATS
promulgated by the Commission under the Act) \18\ for trading of over-
the-counter bulletin board securities that are not traded on any
securities exchange or Nasdaq (including, for the avoidance of doubt,
The NASDAQ National Market and The NASDAQ SmallCap Market) (such
function was referred to as the ``ATS OTC Function'' in the Order
Approving SR-PCX-2005-90). Because Arca Trading is a broker-dealer and
an ETP Holder, and a wholly-owned subsidiary and, consequently, a
Related Person, of Archipelago, it falls within the definition of
``Prohibited Persons.'' Absent an exception, Archipelago's ownership of
PCXH would cause Arca Trading to exceed the voting and ownership
limitations imposed by Article Nine of the PCXH Certificate of
Incorporation. Therefore, in connection with the PCXH Acquisition, PCX
requested an exception on a pilot basis for Arca Trading from the
ownership and voting limitations in the PCX Certificate of
Incorporation for Archipelago's ownership and operation of the ATS OTC
Function of Arca Trading.\19\ The Commission approved PCX's proposal
and allowed Archipelago to continue to own and operate the ATS OTC
Function of Arca Trading for a period of 60 days following the closing
of the PCXH Acquisition.\20\ The pilot approval was designed to provide
the public and other interested parties the opportunity to comment on
the exception before the exception being made permanent. In the Order
Approving SR-PCX-2005-90, the Commission specifically noted that in its
adoption of Regulation ATS, it had stated that exchanges could form
subsidiaries that operate ATSs registered as broker-dealers and that
such subsidiaries would of course be required to become members of a
national securities association or another national securities
exchange.\21\
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\18\ 17 CFR 242.300 through 17 CFR 242.303.
\19\ See Amendment No. 2 to the Original Rule Filing (File
Number SR-PCX-2005-90), at 6 (September 16, 2005) (``Amendment No.
2'').
\20\ See Order Approving SR-PCX-2005-90, at 56960.
\21\ Id. at 56959. The Commission also noted in the Order
Approving SR-PCX-2005-90 that in adopting Regulation ATS, the
Commission stated that any subsidiary or affiliate ATS could not
integrate, or otherwise link the ATS with the exchange, including
using the premises or property of such exchange for effecting or
reporting a transaction, without being considered a facility of the
exchange. Id.
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c. DOT Function of Archipelago Securities
Archipelago Securities is a registered broker-dealer, a member of
the National Association of Securities Dealers, Inc. and an ETP Holder
of PCXE. Among other things, Archipelago Securities engages in the
business of providing broker-dealer clients with direct connectivity,
through the NYSE Designated Order Turnaround System, to the NYSE (such
function was referred to as the ``DOT Function'' in the Order Approving
SR-PCX-2005-90). Because Archipelago Securities is a broker-dealer and
an ETP Holder, and a wholly-owned subsidiary and, consequently, a
Related Person, of Archipelago, it falls within the definition of
``Prohibited Persons.'' Absent an exception, Archipelago's ownership of
PCXH would cause Archipelago Securities to exceed the voting and
ownership limitations imposed by Article Nine of the PCXH Certificate
of Incorporation. Therefore, in connection with the PCXH Acquisition,
PCX requested an exception on a pilot basis for Archipelago Securities
from the ownership and voting limitations for Archipelago's ownership
and operation
[[Page 71594]]
of the DOT Function of Archipelago Securities, on the condition that in
no event would Archipelago or PCX request that this exception be
extended beyond the completion of the Proposed Archipelago NYSE
Merger.\22\ In the Order Approving SR-PCX-2005-90, the Commission
approved PCX's request for Archipelago to continue to own and operate
the DOT Function of Archipelago Securities until the earlier of a
period of 60 days following the closing of the PCXH Acquisition and the
closing of the Proposed Archipelago NYSE Merger.\23\
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\22\ See Amendment No. 2, at 7.
\23\ See Order Approving SR-PCX-2005-90, at 56960.
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d. Requests for Approval
Because the PCXH Acquisition was consummated on September 26, 2005,
the temporary approvals with respect to the ATS OTC Function of Arca
Trading and the DOT Function of Archipelago Securities will expire on
November 25, 2005. The Exchange hereby submits to the Commission the
following requests:
(i) The Exchange hereby requests that the Commission approve
Archipelago's ownership and operation of the ATS OTC function of Arca
Trading on a permanent basis. Without the Commission's approval sought
hereby, upon the expiration of the 60 day pilot approval, Archipelago's
ownership of PCXH would cause Arca Trading to exceed the voting and
ownership limitations imposed by Article Nine of the PCXH Certificate
of Incorporation because ATS, a broker-dealer and an ETP Holder of
PCXE, is a wholly owned subsidiary and, consequently, a Related Person,
of Archipelago.
(ii) The Exchange hereby requests that the Commission approve an
extension of the pilot approval with respect to Archipelago's ownership
and operation of the DOT Function of Archipelago Securities until the
closing of the Proposed Archipelago NYSE Merger. Without the
Commission's approval sought hereby, upon the expiration of the 60 day
pilot approval, Archipelago's ownership of PCXH would cause Archipelago
Securities to exceed the voting and ownership limitations imposed by
Article Nine of the PCXH Certificate of Incorporation because
Archipelago Securities, a broker-dealer and an ETP Holder of PCXE, is a
wholly owned subsidiary and, consequently, a Related Person, of
Archipelago and the approval of the other functions of Archipelago
Securities granted by the Commission previously were limited in scope
and did not include its DOT Function.
2. Basis
The Exchange believes that the proposed rule change in this filing
is consistent with section 6(b) of the Act,\24\ in general, and
furthers the objectives of section 6(b)(1),\25\ in particular, in that
it enables the Exchange to be so organized so as to have the capacity
to be able to carry out the purposes of the Act and to comply, and
(subject to any rule or order of the Commission pursuant to section
17(d) or 19(g)(2) of the Act) to enforce compliance by its exchange
members and Persons associated with its exchange members, with the
provisions of the Act, the rules and regulations thereunder, and the
rules of the Exchange. The Exchange also believes that this filing
furthers the objectives of section 6(b)(5),\26\ in particular, because
the rules summarized herein would create a governance and regulatory
structure with respect to the operation of the business of PCX \27\
that is designed to help prevent fraudulent and manipulative acts and
practices; to promote just and equitable principals of trade; to foster
cooperation and coordination with Persons engaged in regulating,
clearing, settling, processing information with respect to, and
facilitating transactions in securities; and to remove impediments to
and perfect the mechanism of a free and open market and a national
market system, and, in general, to protect investors and the public
interest.
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\24\ 15 U.S.C. 78f(b).
\25\ 15 U.S.C. 78f(b)(1).
\26\ 15 U.S.C. 78f(b)(5).
\27\ PCX clarified that the governance and regulatory structure
created by the proposal relates to the operation of PCX's business
generally, not only to its options business. Telephone conversation
between Janet Angstadt, Deputy General Counsel and Assistant
Corporate Secretary, PCX and Jennifer Dodd, Special Counsel,
Division of Market Regulation, Commission, on November 21, 2005.
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments on the proposed rule change were neither solicited
nor received.
III. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or Send an e-mail to rule-comments@sec.gov. Please include
File Number SR-PCX-2005-125 on the subject line.
Paper Comments
Send paper comments in triplicate to Jonathan G. Katz,
Secretary, Securities and Exchange Commission, Station Place, 100 F
Street, NE., Washington, DC 20549-9303.
All submissions should refer to File Number SR-PCX-2005-125. This
file number should be included on the subject line if e-mail is used.
To help the Commission process and review your comments more
efficiently, please use only one method. The Commission will post all
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml
). Copies of the submission, all subsequent amendments,
all written statements with respect to the proposed rule change that
are filed with the Commission, and all written communications relating
to the proposed rule change between the Commission and any person,
other than those that may be withheld from the public in accordance
with the provisions of 5 U.S.C. 552, will be available for inspection
and copying in the Commission's Public Reference Room. Copies of such
filing also will be available for inspection and copying at the
principal office of PCX. All comments received will be posted without
change; the Commission does not edit personal identifying information
from submissions. You should submit only information that you wish to
make available publicly. All submissions should refer to File Number
SR-PCX-2005-125 and should be submitted on or before December 20, 2005.
IV. Discussion of Commission Findings and Order Granting Accelerated
Approval of Proposed Rule Change
After careful review, the Commission finds that the proposed rule
change is consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national
[[Page 71595]]
securities exchange.\28\ In particular, the Commission finds that the
proposal is consistent with section 6(b)(1) of the Act,\29\ which
requires a national securities exchange to be so organized and have the
capacity to be able to carry out the purposes of the Act and to enforce
compliance by its members and persons associated with its members with
the provisions of the Act, the rules or regulations thereunder, and the
rules of the exchange. The Commission also finds that the proposal is
consistent with section 6(b)(5) of the Act,\30\ which requires, among
other things, that the rules of an exchange be designed to promote just
and equitable principles of trade, to facilitate transactions in
securities, to remove impediments to and perfect the mechanisms of a
free and open market and a national market system, and, in general, to
protect investors and the public interest.
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\28\ In approving the proposed rule change, the Commission has
considered its impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
\29\ 15 U.S.C. 78f(b)(1).
\30\ 15 U.S.C. 78f(b)(5).
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Pursuant to section 19(b)(2) of the Act,\31\ the Commission may not
approve any proposed rule change, or amendment thereto, prior to the
thirtieth day after the date of publication of the notice thereof,
unless the Commission find good cause for so doing. The Commission
hereby finds good cause for approving the proposed rule change prior to
the thirtieth day after publishing notice thereof in the Federal
Register pursuant to section 19(b)(2) of the Act.\32\ The Commission
believes that the requested extensions are consistent with the terms
and conditions set forth in the Order Approving SR-PCX-2005-90, and
notes that in its filing, PCX represented that accelerated
effectiveness of the proposed rule change before the expiration of the
pilot approvals would provide continuity of Archipelago's operation of
the ATS OTC Function and DOT Function. The Commission also notes that
the proposed changes are extensions of exceptions that the Commission
approved on a pilot basis in the Order Approving SR-PCX-2005-90 and, as
such, do not raise any new or novel issues. The pilots are both
currently set to expire on November 25, 2005. Permitting PCX to extend
the pilots will permit Archipelago to avoid disruption of its operation
of the ATS OTC Function and the DOT Function. Furthermore, the
Commission notes that after the publication of the pilot approvals in
the Federal Register, the Commission did not receive any comment with
respect to Archipelago's ownership and operation of the ATS OTC
Function of Arca Trading and the DOT Function of Archipelago
Securities.
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\31\ 15 U.S.C. 78s(b)(2).
\32\ Id.
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For the foregoing reasons, the Commission finds that the proposed
rule change is consistent with the requirements of the Act the rules
and regulations thereunder, and finds that good cause exists to
accelerate approval of the proposed rule change, pursuant to section
19(b)(2) of the Act.\33\
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\33\ Id.
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V. Conclusion
It Is Therefore Ordered, pursuant to section 19(b)(2) of the
Act,\34\ that the proposed rule change (SR-PCX-2005-125) is approved on
an accelerated basis. Specifically, a permanent exception for the ATS
OTC Function of Arca Trading is approved; and the exception for the DOT
Function of Archipelago Securities is approved on a pilot basis until
the closing date of the Proposed Archipelago NYSE Merger.
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\34\ Id.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\35\
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\35\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. E5-6624 Filed 11-28-05; 8:45 am]
BILLING CODE 8010-01-P