[Federal Register: January 3, 2005 (Volume 70, Number 1)]
[Notices]
[Page 131-133]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr03ja05-98]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-50926; File No. SR-NASD-2004-110]
Self-Regulatory Organizations; Order Approving a Proposed Rule
Change, and Amendment Nos. 1, 2 and 3 Thereto, by National Association
of Securities Dealers, Inc. Relating to Divestiture of Its Interest in
the American Stock Exchange LLC
December 23, 2004.
I. Introduction
On July 16, 2004 the National Association of Securities Dealers,
Inc. (``NASD'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission''), pursuant to section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to reflect NASD's pending
divestiture of its ownership interest in the American Stock Exchange
LLC (``Amex'') pursuant to a Transaction Agreement between Amex and
NASD wherein the the Amex Membership Corporation will become the sole
owner of Amex (the ``Transaction'').\3\ NASD amended the proposal on
August 10, 2004,\4\ August 25, 2004,\5\ and September 3, 2004.\6\ The
proposed rule change was published for comment in the Federal Register
on September 23, 2004.\7\ A correction to the proposed rule change was
published in the Federal Register on October 5, 2004.\8\ No comments
were received on the proposal. This order approves the proposal, as
amended.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Exchange Act Release No. 50057 (July 22, 2004); 69 FR
45091, July 28, 2004) (SR-AMEX-2004-50) for a detailed description
of the Transaction.
\4\ See letter from Barbara Z. Sweeney, Senior Vice President
and Corporate Secretary, NASD, to Katherine A. England, Assistant
Director, Division of Market Regulation (``Division''), Commission,
dated August 10, 2004 (``Amendment No. 1''). Amendment No. 1
replaced NASD's original filing in its entirety.
\5\ See letter from Barbara Z. Sweeney, Senior Vice President
and Corporate Secretary, NASD, to Katherine A. England, Assistant
Director, Division, Commission, dated August 25, 2004 (``Amendment
No. 2''). Amendment No. 2 replaced NASD's earlier amended filing in
its entirety.
\6\ See letter from Barbara Z. Sweeney, Senior Vice President
and Corporate Secretary, NASD, to Katherine A. England, Assistant
Director, Division, Commission, dated September 2, 2004 (``Amendment
No. 3''). Amendment No. 3 modified Exhibit 1 and made certain
technical corrections to the proposal. Amendment No. 3 replaced
NASD's earlier amended filing in its entirety.
\7\ See Securities Exchange Act Release No. 50403 (September 16,
2004), 69 FR 57119.
\8\ See Securities Exchange Act Release No. 50403A (September
29, 2004), 69 FR 59630.
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II. Description of the Proposal
The proposed rule change amends provisions of NASD's By-Laws to
reflect NASD's pending divestiture of its ownership of Amex as a result
of the Transaction; make parallel amendments to the definitional and
conflict-of-interest provisions of the By-Laws of NASD Regulation, Inc.
(``NASD Regulation'') and NASD Dispute Resolution, Inc. (``Dispute
Resolution''); terminate certain undertakings NASD assumed when it
acquired Amex in 1998 (the ``1998 Undertakings''); and make certain
other clarifying amendments. A brief description of the proposed
changes is set forth below.
NASD By-Law Article I (Definitions)
The proposed amendments eliminate references to Amex and/or Nasdaq
from the definitions of ``Industry Director'' and ``Industry
Governor,'' ``Non-Industry Director'' and ``Non-Industry Governor,''
and ``Public Director'' and ``Public Governor.'' NASD proposes to
replace references to Amex and/or Nasdaq in each of those definitions
with the phrase ``a market for which NASD provides regulation.'' Other
references to Amex's ``Floor Governor,'' ``Amex,'' ``Amex Board'' and
``Chief Executive Officer of Amex'' also have been eliminated. NASD
also proposes further clarifying amendments to the definition of ``Non-
Industry Director'' and ``Non-Industry Governor'' to include an officer
or employee of an issuer of unlisted securities that are traded in the
over-the-counter market. NASD represents that this particular change
reflects NASD's historical interpretation of the ``Non-Industry
Director'' and ``Non-Industry
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Governor'' definitions. Parallel changes also have been proposed for
the definitional provisions of the NASD Regulation and Dispute
Resolution By-Laws. NASD also proposes to eliminate other definitions
relating to Amex and Amex-related entities in the NASD Regulation and
Dispute Resolution By-Laws.
NASD By-Law Article VII (Board of Governors)
In section 4 of Article VII, NASD proposes to eliminate two seats
on the NASD Board that have been reserved for the Chief Executive of
Amex and an Amex Floor Governor. The proposal reduces the total number
of Governors on the NASD Board from a range of 17-27 to a range of 15-
25. NASD also proposes to eliminate the term provisions in section 5 of
Article VII that pertains to Amex's Chief Executive Officer, and that
sets the maximum permissible term of the Amex Floor Governor.
NASD By-Law Article IX (Committees)
NASD proposes to eliminate the requirements that at least one
Governor of Amex be included on the NASD Executive Committee and that
at least two members of the NASD Executive Committee be members of
neither Amex nor NASD Regulation Boards. Thus, with the changes, the
NASD Executive Committee would be composed of no fewer than five and no
more than eight Governors, including the Chief Executive Officer of the
NASD and at least one Director of NASD Regulation.
NASD Bylaw Article XV (Limitation of Powers)
Section 4 of Article XV of the NASD Bylaws governs participation of
NASD in transactions in which Amex Governors have an interest. Section
4(b) of Article XV provides that a contract or transaction in which an
Amex Governor has an interest may be permitted if certain disclosures
are made and the contract or transaction is approved by an affirmative
vote of a majority of a quorum of disinterested Governors. Currently,
an Amex-affiliated Governor could be counted as a disinterested
Governor for purposes of determining the presence of a quorum. NASD
proposes to eliminate Amex from the quorum provision and as a result,
NASD represents that an Amex-affiliated Governor will no longer be
counted as disinterested for purposes of determining the presence of a
quorum at the portion of the meeting of the NASD Board that authorizes
a contract or transaction with Amex. Parallel changes are proposed for
the conflict-of-interest provisions of the NASD Regulation and Dispute
Resolution By-Laws.
1998 Undertakings
Amex proposes to withdraw the principles that it adopted in 1998
that would guide the NASD in fulfilling its responsibilities as parent
company of Amex with ultimate responsibility for Amex's compliance with
its statutory responsibilities as a self-regulatory organization. In
the 1998 Undertakings, among other things, NASD represented that it
would exercise its powers and its managerial influence to ensure that
Amex fulfilled its self-regulatory obligations by directing Amex to
take action necessary to effectuate its purposes and functions as a
national securities exchange operating pursuant to the Act, and
ensuring that Amex had, and appropriately allocated, such financial,
technological, technical, and personnel resources as may be necessary
or appropriate to meet its obligations under the Act. NASD also
committed to refraining from taking any action with respect to Amex
that would impede efforts by Amex to carry out its self-regulatory
obligations.\9\
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\9\ See Exchange Act Release No. 40443 (September 16, 1998), 63
FR 51108 (September 24, 1998) (File No. SR-NASD-98-67--Policies
Regarding Authority Over American Stock Exchange LLC and Composition
of Board of Governors of American Stock Exchange LLC); See also
Exchange Act Release No. 40622 (October 30, 1998), 63 FR 59819
(November 5, 1998) (order approving proposed rule change and
implementing NASD's undertakings regarding Amex).
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III. Commission Findings
The Commission finds the proposed rule change, as amended, is
consistent with section 15A of the Act \10\ and the rules and
regulations thereunder applicable to a national securities association.
In particular, the Commission find the proposed rule change is
consistent with section 15A(b)(6) of the Act,\11\ which requires that
NASD's rules be designed to prevent fraudulent and manipulative acts
and practices, to promote just and equitable principles of trade, and
to protect investors and the public interest.\12\
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\10\ 15 U.S.C. 78o-3.
\11\ 15 U.S.C. 78o-3(b)(6).
\12\ In approving this rule change, the Commission has
considered its impact on efficiency, competition, and capital
formation. 15 U.S.C. 78c(f).
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The Commission finds that it is appropriate for NASD to delete any
mandatory representation of Amex on the NASD Board or NASD Executive
Committee. Following the elimination of Amex representatives on the
NASD's Board, the Board will continue to be a majority independent
because the NASD By-Laws require that the number of Non-Industry
Governors shall exceed the number of Industry Governors.\13\ Given the
NASD's pending divestiture of its ownership interest and control over
the Amex, the Commission finds that it is appropriate for the NASD to
withdraw the 1998 Undertakings. Upon the closing of the Transaction,
NASD will no longer maintain any ownership in or control over Amex.
Therefore the 1998 Undertakings, which imposed upon NASD certain
obligations as the owner of Amex, will no longer be applicable.
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\13\ The Commission also notes that the NASD's By-Laws continue
to require that a certain number of Public Governors be on the NASD
Board, depending on the exact number of NASD Governors in total.
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The Commission finds that the changes proposed by NASD that delete
references to Amex and replace those references with broader provisions
are appropriate. For example, NASD proposes to amend the definitions of
``Industry Director'' and ``Industry Governor,'' ``Non-Industry
Director'' and ``Non-Industry Governor,'' and ``Public Director'' and
``Public Governor'' by deleting references to Amex and/or Nasdaq with
``a market regulated by the NASD.'' The Commission believes that this
change is appropriate because it takes into account NASD's current--and
anticipated--contractual relationship with other market centers, and
more importantly, clarifies how an individual's affiliation with such a
market center might affect his/her qualification for that particular
classification. The same rationale makes corresponding changes to the
same definitions in the NASD Regulation and Dispute Resolution By-Laws
appropriate.
The Commission also finds that the clarifying amendments that NASD
proposes are appropriate. For example, NASD's definition of Non-
Industry Director and Non-Industry Governor previously included an
officer or director of ``securities traded in the over-the-counter
market.'' As noted above, NASD is clarifying this prong of that
definition to include an officer or employee of an issuer of unlisted
securities. The NASD proposes this change to align the rule text with
NASD's current practice of how it applies this prong of the definition
of Non-Industry Director and Non-Industry Governor. NASD stated that
this is not a substantive change.\14\ In addition, the
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Commission believes that deletion of Amex from the quorum requirements
of NASD, NASD Regulation and Dispute Resolution's By-Laws governing
participation in transactions in which Amex Governors have a conflict
of interest is appropriate because it clarifies that an Amex-affiliated
Governor cannot be counted as disinterested for quorum purposes in a
meeting of the NASD Board that authorizes a contract or transaction
with Amex. Finally, the Commission finds that it is appropriate to
eliminate the requirement that at least two members of the Executive
Committee be members of neither the Amex nor NASD Regulation Boards
because the original concern that prompted this requirement--that
market interests might dominate the NASD Board--no longer poses any
regulatory or governance concern.
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\14\ Specifically, an officer or employee of a listed issuer
could still qualify as an Industry Director or Industry Governor or
Public Director or Public Governor if the officer or employee met
the requirements for those categories, and could still qualify as a
Non-Industry Director or Non-Industry Governor under the prong of
that definition that states that a Non-Industry Director or Non-
Industry Governor is ``any other individual who would not be an
Industry Director.'' Thus, before and after this change, an officer
or employee of a listed issuer could qualify in any of these three
categories.
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It is therefore ordered, pursuant to section 19(b)(2) of the
Act,\15\ that the proposed rule change, NASD 2004-110, as amended, be,
and hereby is approved. The proposed rule change shall be effective
upon the closing of the Transaction.
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\15\ 15 U.S.C. 78s(b)(2).
By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E4-3907 Filed 12-30-04; 8:45 am]
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