[Federal Register Volume 74, Number 136 (Friday, July 17, 2009)]
[Notices]
[Pages 34840-34842]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-17005]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-60276; File No. SR-NASDAQ-2009-042]
Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order
Approving Proposed Rule Change To Amend Its Limited Liability Agreement
and By-Laws
July 9, 2009.
On April 29, 2009, The NASDAQ Stock Market LLC (``NASDAQ Exchange''
or ``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to amend its Limited Liability Agreement
(``Agreement'') and By-Laws.\3\ The proposed rule change was published
for comment in the Federal Register on May 20, 2009.\4\ The Commission
received no comments regarding the proposal. This order approves the
proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ The Agreement includes and incorporates an exhibit
designated as the By-Laws of the NASDAQ Stock Market LLC.
Accordingly, the By-Laws are part of the Agreement. See Securities
Exchange Act Release No. 59907 (May 12, 2009), 74 FR 23761
(``Notice''), 23761 n.3.
\4\ See Notice, supra note 3.
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I. Description of the Proposed Rule Change
Currently, the NASDAQ Exchange board and the board of its parent
company, NASDAQ OMX Group, Inc. (``NASDAQ OMX''), maintain their own
audit committee and management compensation committees. As more fully
discussed in the Notice, the Exchange states that it has found the work
of these committees to overlap substantially.\5\ As a result, the
Exchange proposes to revise its Agreement to allow for the elimination
of its audit and management compensation committees.
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\5\ See Notice, 74 FR at 23761.
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The Exchange also proposes to amend the Agreement to allow for the
elimination of its arbitration and mediation committee, provided that
the NASDAQ Exchange's arbitration and mediation program is operated by
the Financial Industry Regulatory Authority (``FINRA''), which the
NASDAQ Exchange states is currently the case.
In addition, as discussed in the Notice, the Exchange proposes
changes to its rules governing the selection of Member Representative
Directors, as well as to update certain aspects of its Agreement.\6\
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\6\ Specifically, the Exchange would: reflect the name change of
The Nasdaq Stock Market, Inc. to The NASDAQ OMX Group, Inc.; reflect
the name change of National Association of Securities Dealers, Inc.
to FINRA; correct typographical errors in the definition of
``Industry member'' in Article I of the By-Laws and in Section 6 of
the Agreement; and redesignate the Agreement as the ``Second Amended
Limited Liability Company Agreement of The NASDAQ Stock Market
LLC.''
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II. Discussion and Commission Findings
After careful review, the Commission finds that the proposed rule
change is consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities exchange.\7\
In particular, the Commission finds that the proposed rule change is
consistent with Section 6(b)(1) of the Act,\8\ which requires a
national securities exchange to be so organized and have the capacity
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 Commission also finds that the proposed
rule change is consistent with Section 6(b)(3) of the Act,\9\ which
requires that the rules of a national securities exchange assure a fair
representation of its members in the selection of its directors and
administration of its affairs and provide that one or more directors
shall be representative of issuers and investors and not be associated
with a member of the exchange, broker, or dealer. The Commission
further finds that the proposed rule change is consistent with Section
6(b)(5) of the Act,\10\ in that it is designed, among other things, to
prevent fraudulent and manipulative acts and practices, to promote just
and equitable principles of trade, to remove impediments to and perfect
the mechanism of a free and open market and a national market system,
and, in general, to protect investors and the public interest. The
Commission previously approved a structure in which certain committees
of the board of directors of NYSE Euronext, including the audit and
compensation committees, were authorized to perform functions for
various subsidiaries, including the New York Stock Exchange, LLC
(``NYSE'').\11\
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\7\ In approving this proposed rule change, the Commission notes
that it has considered the proposed rule's impact on efficiency,
competition, and capital formation. See 15 U.S.C. 78c(f).
\8\ 15 U.S.C. 78f(b)(1).
\9\ 15 U.S.C. 78f(b)(3).
\10\ 15 U.S.C. 78f(b)(5).
\11\ Securities Exchange Act Release No. 55293 (February 14,
2007), 72 FR 8033 (February 22, 2007) (SR-NYSE-2006-120).
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A. Elimination of the Exchange's Audit and Management Compensation
Committees
Currently, the NASDAQ Exchange audit committee is primarily charged
with: (1) Oversight of the NASDAQ Exchange's financial reporting; (2)
oversight of the systems of internal controls established by management
and the NASDAQ Exchange board, as well as the legal and compliance
process; (3) selection and evaluation of independent auditors; and (4)
direction and oversight of the internal audit function. The Exchange
states that the responsibilities of the NASDAQ Exchange's audit
committee are fully duplicated \12\ by the
[[Page 34841]]
responsibilities of the NASDAQ OMX audit committee.\13\ In addition,
the NASDAQ Exchange states that its regulatory oversight committee has
broad authority to oversee the adequacy and effectiveness of its
regulatory and self-regulatory organization responsibilities, and
therefore is able to maintain oversight over internal controls in
tandem with the NASDAQ OMX audit committee. Further, the NASDAQ
Exchange states that the practice of NASDAQ OMX's Internal Audit
Department (``Department''),\14\ which performs internal audit
functions for all NASDAQ OMX subsidiaries, is to report to the NASDAQ
Exchange regulatory oversight committee on all internal audit matters
relating to the NASDAQ Exchange will be formally reflected in the
Department's written procedures. The Exchange also represents that, to
ensure that its board retains authority to direct the Department's
activities with respect to the NASDAQ Exchange, the Department's
written procedures will be amended to stipulate that the NASDAQ
Exchange regulatory oversight committee may, at any time, direct the
Department to conduct an audit of a matter of concern to it and report
the results of the audit both to the NASDAQ Exchange regulatory
oversight committee and the NASDAQ OMX audit committee.\15\
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\12\ Specifically the NASDAQ Exchange states the NASDAQ OMX
audit committee, described infra at n.13, has broad authority to
review the financial information that will be provided to
shareholders and others, systems of internal controls, and audit,
financial reporting and legal and compliance processes and, because
NASDAQ OMX's financial statements are prepared on a consolidated
basis that includes the financial results of NASDAQ OMX's
subsidiaries, including the Exchange, the NASDAQ OMX audit
committee's purview necessarily includes these subsidiaries. In
addition, the NASDAQ OMX audit committee currently is charged with
providing oversight over financial reporting and independent auditor
selection for NASDAQ OMX and all of its subsidiaries, including the
Exchange; and the NASDAQ OMX audit committee has general
responsibility for oversight over internal controls and direction
and oversight over the internal audit function for NASDAQ OMX and
all of its subsidiaries. See Notice, 74 FR at 23761, 23762.
\13\ The NASDAQ OMX audit committee is composed of four or five
directors, all of whom must be independent under the standards
established by Section 10A(m) of the Act and the listing rules of
the NASDAQ Exchange. All committee members must be able to read and
understand financial statements, and at least one member must have
past employment experience in finance or accounting, requisite
professional certification in accounting, or any other comparable
experience or background that results in the individual's financial
sophistication.
\14\ See Notice, 74 FR at 23762.
\15\ See id.
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The Exchange also proposes to allow the elimination of its
compensation committee, and to prescribe that the functions of that
committee be performed by the NASDAQ OMX compensation committee or by
the full NASDAQ Exchange board, when required. The NASDAQ OMX By-Laws
provide that its compensation committee considers and recommends
compensation policies, programs, and practices for employees of NASDAQ
OMX. Many employees performing work for the NASDAQ Exchange are also
employees of NASDAQ OMX, and certain senior officers of the NASDAQ
Exchange are also officers of NASDAQ OMX and other NASDAQ OMX
subsidiaries because their responsibilities relate to multiple entities
within the NASDAQ OMX corporate structure.\16\ As a result, NASDAQ OMX
establishes compensation and compensation policy for these employees.
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\16\ Id.
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To the extent that policies, programs, and practices must be
established for any NASDAQ Exchange officers or employees who are not
also NASDAQ OMX officers or employees, the Exchange states that its
board will perform such actions without the use of a compensation
committee, subject to recusal by Staff Directors.\17\
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\17\ See NASDAQ Exchange By-Laws, Article I(j). Staff Directors
are directors of the Exchange that are also serving as officers.
Because the NASDAQ Exchange board would not be responsible for
setting the compensation of any Staff Directors who are also
officers of NASDAQ OMX, these directors would be permitted to
participate in discussions concerning compensation of Exchange
employees, but the Exchange states that they must recuse themselves
from a vote on the subject to allow the determination to be made by
directors that are not officers or employees of the Exchange. The
NASDAQ Exchange also states that, if a Staff Director is not also an
employee of NASDAQ OMX, that Staff Director also must absent himself
or herself from any deliberations regarding his or her compensation.
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The Commission notes that the proposed elimination of the NASDAQ
Exchange audit and management compensation committees is comparable to
a structure for the NYSE that the Commission previously considered and
approved.\18\ The Commission finds that the proposed elimination of the
NASDAQ Exchange's audit and management compensation committees is
consistent with the Act.
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\18\ See Securities Exchange Act Release No. 55293 (February 14,
2007), 72 FR 8033 (February 22, 2007) (SR-NYSE-2006-120).
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B. Elimination of the NASDAQ Exchange's Arbitration and Mediation
Committee.
As provided in the Agreement, the arbitration and mediation
committee is to advise the Board on the development and maintenance of
an equitable and efficient system of dispute resolution that will
equally serve the needs of public investors and NASDAQ Exchange
members, to monitor rules and procedures governing the conduct of
dispute resolution, and to have such other powers and authority as are
necessary to effectuate the purposes of the NASDAQ Exchange rules. The
Exchange states that, at this time, there is no meaningful role for
this committee to play because the NASDAQ Exchange's arbitration and
mediation program presently is operated by FINRA. All information
needed by the NASDAQ Exchange board or staff to evaluate the
effectiveness of FINRA's administration of the program is obtained
through the Exchange's oversight of FINRA's performance through its
authority under its regulatory services agreement to obtain reports
from FINRA and to conduct audits.
The Commission notes that neither the Exchange nor its predecessor
(The Nasdaq Stock Market, Inc.) has ever operated a dispute resolution
program that was not administered by FINRA or its predecessor (the
National Association of Securities Dealers, Inc.).\19\ Therefore, no
ongoing dispute will be affected by the elimination of this committee.
In the addition, the Agreement, as revised, would continue to provide
for the establishment of such a committee in the event that the NASDAQ
Exchange in the future opts to establish an arbitration or mediation
program that is not operated by FINRA in accordance with FINRA rules.
The Commission therefore finds that the proposed rule change is
consistent with the Act, as the Exchange will continue to be organized
and have the capacity to carry out the purposes of the Act and to
comply with and enforce compliance by its members and persons
associated with its members with the provisions of the Act, the rules
and regulations thereunder, and the rules of the Exchange.
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\19\ See Notice, 72 FR at 23762, n.16.
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C. Selection of Member Representative Directors
Under the Agreement, 20% of the Exchange's directors are selected
through a process in which the Exchange's member nominating committee
nominates a slate of candidates but members also have the opportunity
to nominate alternative candidates. If no alternative candidates are
nominated by members, the candidates recommended by the member
nominating committee are elected. Alternatively, if alternative
candidates are nominated, there is a ``Contested Election'' in which
members cast ballots in order to determine who fills the vacancies. The
Exchange proposes to prohibit a member, either alone or together with
its affiliates, from
[[Page 34842]]
casting votes representing more than 20% of the votes cast for a
candidate, and to provide that any votes cast by the member, either
alone or together with its affiliates in excess of the 20%, limit shall
be disregarded. The Exchange also proposes to amend its By-Laws to
provide that an Election Date is selected by the Exchange's board on an
annual basis, and that members only cast votes on such date if there is
a Contested Election. The Commission finds that these changes are
consistent with the Act, including Section 6(b)(3) of the Act,\20\
which requires that a national securities exchange assure the fair
representation of its members in the selection of its directors and
administration of its affairs. The Commission recently approved similar
changes proposed by NASDAQ OMX BX, Inc.\21\
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\20\ 15 U.S.C. 78f(b)(3).
\21\ See Securities Exchange Act Release Nos. 58324 (August 7,
2008), 73 FR 46936, 46940-41 (August 12, 2008) (SR-BSE-2008-02, -23,
-25, SR-BSECC-2001-01) and 58864 (October 27, 2008), 73 FR65430
(November 3, 2009) (SR-BSE-2008-45).
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III. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\22\ that the proposed rule change (SR-NASDAQ-2009-042) be, and it
hereby is, approved.
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\22\ 15 U.S.C. 78s(b)(2).
\23\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets, pursuant
to delegated authority.\23\
Elizabeth M. Murphy,
Secretary.
[FR Doc. E9-17005 Filed 7-16-09; 8:45 am]
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