
[Federal Register Volume 76, Number 83 (Friday, April 29, 2011)]
[Notices]
[Pages 24069-24074]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-10362]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-64338; File No. SR-Phlx-62011-13]


Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Order 
Approving Proposed Rule Change, as Modified by Amendment No. 1, 
Relating to Amendments to NASDAQ OMX PHLX LLC's Limited Liability 
Company Agreement, By-Laws, Rules, Advices and Regulations

April 25, 2011.

I. Introduction

    On February 16, 2011, NASDAQ OMX PHLX LLC (``Phlx'' 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 alter its governance structure and to make 
other non-substantive conforming changes. The proposed rule change was 
published for comment in the Federal Register on March 4, 2011.\3\ On 
April 15, 2011, the Exchange filed Amendment No. 1 to the proposed rule 
change.\4\ The Commission received no comment letters regarding the 
proposal. This order approves the proposed rule change, as modified by 
Amendment No. 1.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 63981 (February 25, 
2011), 76 FR 12180 (March 4, 2011) (``Notice'').
    \4\ In Amendment No. 1, the Exchange amended the text of Rules 
607, 862, 1012, 1017, 1058, 1079, 1080, 1082, and 3202 to reflect 
separate and unrelated intervening proposed rule changes that became 
effective after this proposal was published for comment. Because 
Amendment No. 1 is technical in nature, the Commission is not 
required to publish it for comment.
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II. Description of the Proposal

    The Exchange proposes to amend its Limited Liability Company 
Agreement (``LLC Agreement'') and By-Laws to substantially conform them 
to The NASDAQ Stock Market LLC's (``NASDAQ'') Second Amended Limited 
Liability Company Agreement (``NASDAQ LLC Agreement'') and By-Laws, 
respectively. These conforming changes include, among other things: (1) 
The elimination of the Exchange's Series A Preferred Stock and 
dissolution of the Member Voting Trust; (2) modifications to the 
Exchange's board and committee structure to harmonize it with NASDAQ's 
board and committee structure; \5\ (3) the elimination of foreign 
currency option (``FCO'') participations, of which there are none 
outstanding; (4) the elimination of definitions, rules, and references 
to XLE (the Exchange's former equities trading platform); and (5) 
changes to other terms, names, and cross-references contained in the 
Exchange's LLC Agreement and By-Laws, including technical and 
grammatical changes to reflect the Exchange's recent conversion from a 
Delaware corporation to a Delaware limited liability company 
(``LLC''),\6\ and changes to clarify and simplify the By-Laws, Rules, 
Option Floor Procedure Advices and Equity Floor Procedure Advices (the 
latter two are collectively referred to herein as ``Advices''), and 
Regulations of the Exchange.
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    \5\ To align itself with the terminology used by NASDAQ, the 
Exchange proposes to rename the Board of Governors to now be the 
Board of Directors (``Board''). As a result, all references to 
``Governors'' would be changed to ``Directors'' in the By-Laws, 
Rules, Advices, and Regulations of the Exchange. See Notice, supra 
note 3, 76 FR at 12181, 12185, 12189.
    \6\ See Securities Exchange Act Release No. 62783 (August 27, 
2010), 75 FR 54204 (September 3, 2010) (SR-Phlx-2010-104). As a 
result of the conversion, all references to Incorporation would be 
changed to LLC in the By-Laws, Rules, Advices, and Regulations of 
the Exchange. The specific proposed rule changes relating to this 
amendment are discussed in detail in the Notice. See Notice, supra 
note 3, 76 FR at 12181, 12189.
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A. Elimination of the Series A Preferred Stock and Dissolution of the 
Member Voting Trust

    The Exchange proposes to amend the Exchange's formation documents 
to eliminate the Series A Preferred Stock. In 2003, Phlx, formerly the 
Philadelphia Stock Exchange, Inc., filed with the Commission to amend 
its formation documents to form a demutualized Delaware stock 
corporation.\7\ At the time of demutualization, the Exchange amended 
its Certificate of Incorporation to designate one share of preferred 
stock as the ``Series A Preferred Stock,'' the holder of which had the 
sole power to select and remove the On-Floor Governors,\8\ in 
accordance with specified procedures.\9\ A trust agreement was created 
and the one and only outstanding share of Series A Preferred Stock was 
then held by the Phlx Member Voting Trust (``Trust''). The Exchange 
believes that these arrangements were necessary at the time of 
demutualization to preserve the ability of members to vote for and 
affirmatively elect certain board Governors because: (i) Under Delaware 
law, only stockholders can elect the directors of a Delaware 
corporation; and (ii) after the demutualization, Members and Member 
Organizations that were not owners at the time of the demutualization 
were not stockholders of the Exchange.\10\
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    \7\ See Securities Exchange Act Release No. 49098 (January 16, 
2004), 69 FR 3974 (January 27, 2004) (SR-Phlx-2003-73).
    \8\ ``On-Floor Governors'' were the Governors elected by the 
Exchange's Members and Member Organizations. See Securities Exchange 
Act Release No. 53734 (April 27, 2006), 71 FR 26589 (May 5, 2006) 
(SR-Phlx-2005-93); e-mail from Angela S. Dunn, Assistant General 
Counsel, Office of the General Counsel, NASDAQ OMX (``Dunn''), to 
Ronesha A. Butler, Special Counsel, Division of Trading and Markets, 
Commission (``Butler''), dated April 20, 2011 (``Dunn Email''). See 
also supra note 7 (discussing On-Floor Governors).
    \9\ See supra note 7.
    \10\ See Notice, supra note 3, 76 FR at 12181.
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    After the Exchange's demutualization, the trustee of the Trust, 
pursuant to the Amended Trust Agreement, had the power to vote the 
share of Series A Preferred Stock to elect the Member Governor and the 
Designated Independent Governors,\11\ as directed by the vote of the 
Member Organization Representatives of Member Organizations entitled to 
vote pursuant to Article III of the By-Laws. According to the Exchange, 
this process was designed to facilitate the exercise by Members and 
Member Organizations of their rights to fair representation in the 
selection and removal of certain Governors of the Exchange and to 
facilitate the administration of the affairs of the Exchange in 
accordance with the Act.\12\ In particular, the Trust ensured that the 
candidates for Governor elected by vote of the Members were, in turn, 
validly elected to the Board of Governors pursuant to Delaware law and 
that the Members' vote could not be overridden.
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    \11\ After the Exchange's demutualization, the term ``On-Floor 
Governors'' was eliminated and replaced by the Member Governor and 
the Designated Independent Governors. See Dunn Email, supra note 8. 
``Member Governor'' means a Governor who is a Member or a general 
partner or an executive officer (vice-president and above) of a 
Member Organization and is duly elected to fill the one vacancy on 
the Board of Governors allocated to the Member Governor. See By-Laws 
Article I. ``Designated Independent Governors'' means those 
Independent Governors who are elected by the holder of the Series A 
Preferred Stock. See id.
    \12\ See Notice, supra note 3, 76 FR at 12181.
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    In 2008, the Exchange was acquired by and became a wholly-owned 
subsidiary of The NASDAQ OMX Group, Inc. (``NASDAQ OMX''). The Exchange 
represents that, since the acquisition by NASDAQ OMX, there are no 
longer any other common

[[Page 24070]]

shareholders of Phlx.\13\ As a result, the Exchange's formation 
documents were amended so that the Series A Preferred Stockholder is 
the sole preferred shareholder of the Exchange and elects the Member 
Governor and the Designated Independent Governors pursuant to Section 
16 of the LLC Agreement and Article IV of the By-Laws.\14\ Currently, 
the number of Designated Independent Governors, together with the 
Member Governor, equals at least 20% of the total number of Governors 
who are elected by the Series A Preferred Stockholder. Further, Phlx 
recently restructured to a limited liability company and thus is no 
longer a corporation subject to Delaware corporate law.\15\ 
Accordingly, the Exchange proposes to amend the LLC Agreement to refer 
to the fact that it has a single stockholder--NASDAQ OMX 
(``Stockholder'').
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    \13\ See id.
    \14\ The Exchange represents that the Series A Preferred Stock 
is still held by the Trust pursuant to the Third Amended and 
Restated Trust Agreement dated February 22, 2007 (``Amended Trust 
Agreement''). See Notice, supra note 3, 76 FR at 12181.
    \15\ See supra note 6.
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    Because the Exchange believes the Series A Preferred Stock 
mechanism is no longer necessary to facilitate the exercise by Members 
and Member Organizations of their rights to fair representation, Phlx 
proposes to eliminate the Trust in favor of a nomination process for 
Member Representative Directors that is identical to the process 
currently utilized by NASDAQ.\16\ The Exchange believes that its 
proposed board structure and election process, identical to that of 
NASDAQ, would provide Members and Member Organizations fair 
representation in the selection and removal of certain directors of the 
Exchange (``Directors'') in accordance with the Act.\17\ The Exchange 
would maintain the requirement that at least 20% of the Directors would 
be Member Representative Directors, and all Directors other than the 
Member Representative Directors would be elected by the Stockholder as 
described in the By-Laws.\18\
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    \16\ The term ``Member Representative Director'' would mean a 
Director who has been elected or appointed after having been 
nominated by the Member Nominating Committee or by a Member pursuant 
to the By-Laws. A Member Representative Director may be, but is not 
required to be, an officer, director, employee, or agent of a 
Member. See Notice, supra note 3, 76 FR at 12185.
    \17\ See id. at 12181. The Exchange is not proposing to amend 
its By-Laws with respect to the nomination of Directors, which 
process is currently the same as that of NASDAQ. Rather, the 
Exchange is proposing to eliminate the prior mechanism concerning 
the actual election of designated directors that the Series A 
Preferred Stock and accompanying Trust were designed to facilitate.
    \18\ See LLC Agreement, Section 8.
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    The Exchange represents that it would continue to accept 
nominations from Members and Member Organizations for certain 
designated Board positions.\19\ With respect to the election of the 
Member Representative Directors, the Exchange represents the process 
would remain substantially unchanged.\20\ In an uncontested election 
(i.e., when there is only one candidate nominated for each open Member 
Representative Director position), the Stockholder would be obligated 
to elect the Member Representative Directors from the list of 
candidates provided by the Member Nominating Committee.\21\ In a 
contested election, the Stockholder would be obligated to elect the 
persons on the list of candidates who received the most Member votes, 
where the Members have the right to cast one vote for each Member 
Representative Director position to be filled.\22\ The Stockholder 
would not have discretion to do anything other than vote for the Member 
Representative Director candidates nominated as described above.
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    \19\ See Notice, supra note 3, 76 FR at 12181.
    \20\ See id. at 12184.
    \21\ See id.
    \22\ See id. Pursuant to proposed By-Laws Article II, Section 2-
1, a candidate would be added to the list of candidates by a Member 
that submits a timely and duly executed written nomination to the 
Secretary of the Exchange. The Exchange represents that it provides 
Members procedures to nominate candidates at each annual meeting. 
See Notice, supra note 3, 76 FR at 12182.
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B. Composition of the Board

    The Exchange proposes to conform its Board structure to mirror that 
of NASDAQ's, including provisions related to composition and powers, 
standing committees, meetings, and quorum. Among other provisions, the 
Exchange proposes to amend its LLC Agreement to indicate that the 
Stockholder would have discretion to determine the size of the Board, 
subject to compositional and term requirements. The authorized number 
of Directors could be increased or decreased by the Stockholder at any 
time, upon notice to all Directors, but no decrease in the number of 
Directors could shorten the term of any incumbent Member Representative 
Director.\23\ Currently, the By-Laws give the Board of Governors the 
exact same discretion.\24\
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    \23\ See NASDAQ LLC Agreement, Section 9.
    \24\ See By-Laws Article IV, Section 4-1.
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    Phlx would retain one-year terms for Directors and would allow for 
removal of a Director for cause (e.g., the Director no longer satisfies 
the classification for which the Director was elected or the Director's 
continued service as such would violate the compositional requirements 
of the Board).\25\ Additionally, the Exchange would retain the 
discretion to hold Member meetings.\26\
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    \25\ See NASDAQ By-Laws Article II, Section 2; Notice, supra 
note 3, 76 at 12184-85. Currently, Governors are elected for one 
year. See By-Laws Article IV, Section 4-3. Similar to NASDAQ 
provisions, each Director elected, designated, or appointed by the 
Stockholder would hold office until a successor is elected and 
qualified or until the earlier of such Director's death, 
resignation, expulsion, or removal.
    \26\ See By-Laws Article IV, Section 4-11; Dunn Email, supra 
note 8.
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    The Exchange proposes to amend its By-Laws regarding the annual 
election of Member Representative Directors to mirror the provisions of 
the NASDAQ By-Laws. Specifically, the Stockholder would be able to fill 
a vacancy in a Member Representative Director position on the Board 
with a person from a list of candidates prepared by the Member 
Nominating Committee. Filling such vacancies currently requires a 
majority vote by the Board of Governors.\27\ However, as proposed, the 
vacancy could remain unfilled if the remaining term of the vacant 
Director position is less than six months.\28\
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    \27\ See e-mail from Dunn to Butler, dated April 21, 2011. The 
Exchange also proposes to rename Article II ``Annual Election of 
Member Representative Directors and Other Actions By Members.'' The 
specific NASDAQ By-Laws and the relevant, current By-Laws are 
identified in the Notice. See Notice, supra note 3, 76 FR at 12184.
    \28\ See proposed By-Laws Article II, Section 2-3; NASDAQ By-
Laws Article II, Section 3.
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    The Exchange also proposes to amend the composition qualifications 
for its Board. Currently, the Board of Governors includes: One Governor 
who is the Chief Executive Officer; one Governor who is a Member 
Governor; one Governor who is a Stockholder Governor; and such 
additional Governors, who are Independent Governors, to fill the 
remaining seats, including a number of Designated Independent 
Governors, who, together with the Member Governor, equal at least 20% 
of the total number of Governors.\29\
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    \29\ All of the Governors are required to meet the respective 
qualifications set forth in Article I of the By-Laws. See Notice, 
supra note 3, 76 FR at 12185. The number of Governors is set by the 
Board of Governors. See By-Laws, Section 4-1.
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    As proposed, the new Board would consist of: A number of Non-
Industry Directors, including at least one Public Director and at least 
one Stockholder Director (or if the Board consists of ten or more 
Directors, at least two Stockholder Directors), which would equal or 
exceed the sum of the number of Industry Directors and Member

[[Page 24071]]

Representative Directors to be elected under the terms of the LLC 
Agreement. The Exchange would retain the same 20% requirement with 
respect to directors elected by Members, and the composition of the new 
Board would be identical to that of NASDAQ.
    The Exchange proposes to amend Article I of the By-Laws to 
incorporate changes to defined terms that concern its revised Board 
structure.\30\ The Exchange is proposing to replace the Independent 
Governor designation with ``Public Director,'' the Designated Industry 
Governor/Member Governor designation with ``Member Representative 
Director,'' and the Stockholder Governor designation with ``Stockholder 
Director.''
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    \30\ The specific additions and deletions are listed in the 
Notice. See Notice, supra, note 3, 76 FR at 12183.
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    The Exchange proposes to adopt the following definitions for the 
various Director positions. The term ``Industry Director'' would mean a 
Director who has demonstrated industry experience by satisfying one of 
several criteria.\31\ The term ``Non-Industry Director'' would mean a 
Director who is (i) a Public Director; (ii) an officer, director, or 
employee of an issuer of securities listed on the national securities 
exchange operated by the Exchange; or (iii) any other individual who 
would not be an Industry Director.\32\ The term ``Public Director'' 
would mean a Director who has no material business relationship with a 
broker or dealer, the Exchange or its affiliates, or FINRA.\33\ The 
term ``Stockholder Director'' would mean a Director who is an officer, 
director (or a person in a similar position in business entities that 
are not corporations), designee, or employee of a holder of common 
stock or any affiliate or subsidiary of such holder of common stock and 
is duly elected to fill the one vacancy on the Board allocated to the 
Stockholder Director.\34\
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    \31\ The Director either: (i) Is or has served in the prior 
three years as an officer, director, or employee of a broker or 
dealer, excluding an outside director or a director not engaged in 
the day-to-day management of a broker or dealer; (ii) is an officer, 
director (excluding an outside director), or employee of an entity 
that owns more than 10% of the equity of a broker or dealer, and the 
broker or dealer accounts for more than 5% of the gross revenues 
received by the consolidated entity; (iii) owns more than 5% of the 
equity securities of any broker or dealer, whose investments in 
brokers or dealers exceed 10% of his or her net worth, or whose 
ownership interest otherwise permits him or her to be engaged in the 
day-to-day management of a broker or dealer; (iv) provides 
professional services to brokers or dealers, and such services 
constitute 20% or more of the professional revenues received by the 
Director or 20% or more of the gross revenues received by the 
Director's firm or partnership; (v) provides professional services 
to a director, officer, or employee of a broker, dealer, or 
corporation that owns 50% or more of the voting stock of a broker or 
dealer, and such services relate to the director's, officer's, or 
employee's professional capacity and constitute 20% or more of the 
professional revenues received by the Director or member, or 20% or 
more of the gross revenues received by the Director's or member's 
firm or partnership; or (vi) has a consulting or employment 
relationship with or provides professional services to the Exchange 
(or any affiliate thereof) or the Financial Industry Regulatory 
Authority (``FINRA'') (or any predecessor) or has had any such 
relationship or provided any such services at any time within the 
prior three years. See id. at 12185.
    \32\ See id.
    \33\ See id.
    \34\ See id.
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C. Committees of the Board

    Currently, the Exchange's enumerated standing committees are: An 
Executive Committee, a Regulatory Oversight Committee, a Business 
Conduct Committee, a Nominating Committee, a Member Nominating 
Committee, a Quality of Markets Committee, and an Options Trade Review 
Committee. Additional committees may be established by resolution of 
the Board of Governors.\35\ Each standing committee is currently 
composed of not more than nine members, including ex-officio members, 
except for the Options Trade Review Committee which may be composed of 
twenty members.\36\ Currently, the chair of each standing committee 
must be a member of the Board of Governors and at least one other 
person on each committee must be a Governor, except for the Options 
Trade Review Committee.\37\ All committee members are appointed by the 
Board of Governors, and each appointee serves for one year, except for 
the members of the Options Trade Review Committee who are appointed for 
terms of no more than three years, subject to reappointment by the 
Board of Governors.\38\
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    \35\ See By-Laws Article X; Notice, supra note 3, 76 FR at 
12182.
    \36\ See Notice, supra note 3, 76 FR at 12182.
    \37\ See id.
    \38\ See id.
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    The Exchange proposes to revise its current standing committees to 
more closely align them with the standing committees of NASDAQ. 
Committees would fall into two categories: ``Committees Composed Solely 
of Directors'' or ``Committees Not Composed Solely of Directors.'' This 
categorization of committees would not affect any committee's 
compositional requirements. The Executive Committee, a Finance 
Committee,\39\ and the Regulatory Oversight Committee, all of which the 
Exchange currently has, would be Committees Composed Solely of 
Directors. The Nominating Committee, the Member Nominating Committee, 
and the Business Conduct Committee, all of which also currently exist, 
would be Committees Not Composed Solely of Directors.\40\
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    \39\ The current By-Laws permit, but do not require, a Finance 
Committee. See By-Laws Article X, Section 10-1.
    \40\ Proposed By-Laws Section 5-1, titled ``Committees,'' would 
require committee members, who are not Directors, to provide the 
Secretary of the Exchange certain information to classify as a 
committee member. See Notice, supra note 3, 76 FR at 12186.
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    The Exchange proposes to amend the composition of the Business 
Conduct Committee by increasing its size from between five and nine to 
between eight and twelve, as determined by the Board.\41\ Further, 
while the composition of the Business Conduct Committee would remain 
majority ``Non-Industry,'' \42\ the compositional requirements would 
change slightly to require that the number of Non-Industry Directors, 
including at least three Public Directors, equal or exceed the sum of 
the number of Industry Directors and Member Representative Directors. 
This new composition would result in Phlx's Business Conduct Committee 
mirroring the composition of the NASDAQ Review Council, which performs 
similar functions.\43\ The Business Conduct Committee would continue to 
include a number of Member Representative Directors equal to at least 
20% of the total number of members.\44\
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    \41\ See id.
    \42\ See id.
    \43\ See NASDAQ By-Laws Article VI, Section 2.
    \44\ Currently, at least one Member who conducts options 
business at the Exchange is required to be on the Business Conduct 
Committee. See By-Laws Article 10, Section 10-11.
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    In addition, the language describing the responsibilities of the 
Quality of Markets Committee would be revised to conform to the 
language used to describe the responsibilities of the NASDAQ Quality of 
Markets Committee, though the Quality of Markets Committee would 
continue to perform the same functions that it performs today.\45\ The 
Quality of Markets Committee would continue to include broad 
representation of market participants, including investors, market 
makers, integrated retail firms, and order entry firms. Further, it 
would

[[Page 24072]]

continue to be comprised of a number of Member Representative Directors 
that is equal to at least 20% of the total number of members. The 
number of Non-Industry Directors would continue to equal or exceed the 
sum of the number of Industry Directors and Member Representative 
Directors.
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    \45\ See By-Laws Article 10, Section 10-21; NASDAQ By-Laws 
Article III, Section 6. The Quality of Markets Committee would 
continue to: (1) Provide advice and guidance to the Board on issues 
relating to the fairness, integrity, efficiency, and competitiveness 
of the information, order handling, and execution mechanisms of the 
national securities exchange operated by the Exchange from the 
perspective of investors, both individual and institutional, retail 
firms, market making firms, NASDAQ-listed companies, and other 
market participants; and (2) advise the Board with respect to 
national market system plans and linkages between the facilities of 
the Exchange and other markets.
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    Finally, the Exchange proposes to rename its Options Trade Review 
Committee as the Market Operations Review Committee and expand its 
scope to include both equities and options matters.\46\ This committee 
would continue to include a number of Member Representative Directors 
equal to at least 20% of the total number of members. Further, the By-
Laws would continue to require that no more than 50% of the members of 
the Market Operations Review Committee would be engaged in market 
making activity or employed by a Member firm whose revenues from market 
making activity exceed 10% of its total revenues.\47\
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    \46\ Accordingly, all references to ``Options Trade Review 
Committee'' would be changed to ``Market Operations Review 
Committee'' in the By-Laws, Rules, Advices, and Regulations of the 
Exchange as discussed in the Notice. See supra note 3, 76 FR at 
12189. The functions of this committee are specified in Rules 124, 
1092, 3312, and Option Floor Procedure Advice F-27. See id. at 
12187.
    \47\ See By-Laws Article X, Section 10-10; Notice, supra note 3, 
76 FR at 12187.
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D. Meetings of the Board and Committees

    The Exchange proposes to amend its LLC Agreement to modify the 
provisions regarding meetings of the Board to mirror provisions in 
NASDAQ's LLC Agreement which are similar to current Phlx By-Laws.\48\ 
In the absence or disqualification of a member of a committee composed 
solely of Directors, the member or members thereof present at any 
meeting and not disqualified from voting, whether or not such members 
constitute a quorum, could unanimously appoint another member of the 
Board to act at the meeting in the place of any such absent or 
disqualified member.\49\ Members of each committee would hold office 
for such period as may be fixed by a resolution adopted by the Board. 
Any member of a committee could be removed from such committee only by 
the Board, and vacancies could be filled by the Board.
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    \48\ See NASDAQ LLC Agreement, Section 9; By-Laws Article IV, 
Sections 4-10, 4-11, and 4-14.
    \49\ See proposed LLC Agreement, Section 8; NASDAQ LLC 
Agreement, Section 9.
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    The quorum requirements for the Board and the committees are not 
substantively changing. Thus, as proposed, a majority of a committee 
would continue to constitute a quorum and the vote of a majority 
present would continue to be an act of the committee.\50\ Further, any 
committee that consists solely of one or more Directors would continue 
to have and could exercise all the powers and authority of the Board in 
the management of the business and affairs of the Exchange, to the 
extent provided in a resolution of the Board.\51\
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    \50\ See By-Laws Article IV, Section 4-9, and Article X, Section 
10-3.
    \51\ See By-Laws Article X, Section 10-3.
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E. Elimination of Foreign Currency Options Participations

    The initial offering period for FCOs on Phlx began on January 25, 
1982 and extended through the last business day preceding the first day 
of FCO trading on the Exchange.\52\ Access to the Exchange's FCO market 
was available only to those who purchased a FCO participation (``FCO 
Participation''). Non-members were admitted to the Exchange as FCO 
participants (``FCO Participants'') by the Exchange's Admission 
Committee upon completing an application process similar to that 
utilized when Exchange membership was sought.\53\
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    \52\ See Securities Exchange Act Release No. 19134 (October 14, 
1982), 47 FR 46949 (October 21, 1982) (SR-Phlx-82-5).
    \53\ See id.
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    In 2003, when the Exchange demutualized, the Exchange proposed that 
access to the Exchange's facilities and the right to trade would be 
conferred by newly-issued permits rather than by ownership or leasing 
of seats of the Exchange.\54\ However, the Exchange preserved the 
concept of FCO Participations after its demutualization. Trading of 
FCOs continued to be allowed through the FCO Participations, but, since 
demutualization, trading of any product other than FCOs requires 
permits.\55\
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    \54\ See Securities Exchange Act Release No. 48847 (November 26, 
2003), 68 FR 67720 (December 3, 2003) (SR-Phlx-2003-73).
    \55\ See Rule 908. FCO Participants and the organizations upon 
which the Exchange confers FCO trading privileges are subject to all 
the provisions of the Rules that are applicable to Members and 
Member Organizations, and to many provisions of the By-Laws. See 
Notice, supra note 3, 76 FR at 12184.
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    The Exchange represents that it currently does not have any persons 
who are FCO Participants because such participations are no longer 
necessary in light of the fact that a trading permit holder has the 
ability, by virtue of the trading permit, to trade all of the products 
traded on the Exchange, including FCOs.\56\ The Exchange is proposing 
to eliminate FCO Participations and to delete all related references 
and provisions that are only applicable to FCO Participations, 
including remaining provisions concerning seat leases, owners, and 
lessors in the By-Laws and the Rules.
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    \56\ See Notice, supra note 3, 76 FR at 12184.
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F. Technical Changes

    The Exchange proposes to delete definitions and Equity Floor 
Procedure Advices that related solely to the Exchange's former equity 
trading system, XLE, which ceased operations in October 2008.\57\ In 
addition, the Exchange is proposing to change references from ``XLE'' 
to ``PSX,'' the Exchange's recently-launched new cash equities trading 
platform,\58\ where applicable. Rule 3202 notes existing rules which 
are applicable to PSX, and the Exchange proposes to amend it to 
enumerate former By-Laws applicable to PSX participants, which would be 
relocated to sections of the Rules, and to include another rule 
pertaining to listing criteria on PSX.\59\
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    \57\ See Securities Exchange Act Release No. 58613 (September 
22, 2008), 73 FR 57181 (October 1, 2008) (SR-Phlx-2008-65). The 
definitions are listed in the Notice. See supra note 3, 76 FR at 
12189.
    \58\ See Securities Exchange Act Release No. 62877 (September 9, 
2010), 75 FR 56633 (September 16, 2010) (SR-Phlx-2010-79).
    \59\ The specific rules are identified in the Notice. See supra 
note 3, 76 FR at 12190.
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    The Exchange is also proposing to remove outdated references to 
AUTO-X and AUTOM, which references no longer apply to the current 
equity options trading platform, Phlx XL.\60\ Additionally, the 
Exchange proposes to update certain references to AUTOM and AUTO-X with 
references to Phlx XL, where applicable.\61\
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    \60\ The Exchange removed such verbiage from Rule 1014. See 
Securities Exchange Act Release No. 63036 (October 4, 2010), 75 FR 
62621 (October 12, 2010) (SR-Phlx-2010-131); Dunn Email, supra note 
8.
    \61\ See Rule 1080(a).
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    Lastly, the Exchange proposes to amend other references in the 
Rules to correct and update cross-references to sections that were 
impacted by previous rule changes; \62\ to make technical amendments to 
certain rules which are reserved or would benefit from the addition of 
a heading for ease of reference; and to make other non-substantive 
changes. In particular, the Exchange proposes to:
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    \62\ See Securities Exchange Act Release Nos. 42889 (June 2, 
2000), 65 FR 36878 (June 12, 2000) (SR-Phlx-00-12) (a proposal to 
rescind Rule 132); 60169 (June 24, 2009), 74 FR 31782 (July 2, 2009) 
(SR-Phlx-2009-40) (a proposal to amend text in Rule 1043); and 
63036, supra note 60.
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     Amend the LLC Agreement to require explicitly that the 
Board keep books and records within the United States;

[[Page 24073]]

     Permit a transfer or assignment to an affiliate of the 
Stockholder; \63\
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    \63\ The Exchange represents that this change would give the 
Stockholder the ability to transfer or assign the common stock of 
Phlx to an affiliate within the NASDAQ OMX organizational chart. See 
Dunn Email, supra note 8.
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     Add a new Schedule A to the LLC Agreement to define 
certain new terms for ease of reference; \64\
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    \64\ The specific definitions are listed in the Notice. See 
supra note 3, 76 FR at 12183. Additionally, the Exchange proposes to 
adopt new rules of construction to further explain the definitions 
as used in the LLC Agreement, and the current Schedule A, amended to 
eliminate the reference to the Trust, would become Schedule B. See 
id.
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     Replace ``Member Organization Representative'' with 
``Executive Representative;''
     Replace certain references to ``Phlx'' with references to 
the ``Exchange;''
     Update names of other self-regulatory organizations' 
references in the Rules; and
     Change references to reflect the restructuring of certain 
departments of the Exchange, including name changes.\65\


    \65\ The specific references are described in detail in the 
Notice. See id. at 12189.
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The Exchange has represented that these proposed changes are all 
technical in nature and do not constitute substantive or material 
changes.\66\
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    \66\ See id. at 12190.
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III. Discussion

    After careful review of the proposal, the Commission finds that the 
proposed rule change, as modified by Amendment No. 1, is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange.\67\ In 
particular, the Commission finds that the proposal is consistent with 
Section 6(b)(1) of the Act,\68\ 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 further finds that the proposal is consistent 
with Section 6(b)(3) of the Act,\69\ which requires 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. 
The Commission also finds that the proposal is consistent with Section 
6(b)(5) of the Act,\70\ which requires, among other things, that the 
rules of an exchange 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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    \67\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \68\ 15 U.S.C. 78f(b)(1).
    \69\ 15 U.S.C. 78f(b)(3)
    \70\ 15 U.S.C. 78f(b)(5).
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    The Commission finds that the proposed elimination of Phlx's Series 
A Preferred Stock and dissolution of the Trust is consistent with the 
Act. Though it is dismantling the current mechanism through which it 
assures that members have the power to nominate, vote for, and elect 
certain representative governors to its Board of Governors, the 
Exchange is preserving the fair representation of members in the 
selection of governors/directors by adopting provisions that are 
substantially similar to those currently utilized by NASDAQ, which were 
previously approved by the Commission.\71\ In particular, under the new 
process, the Exchange will continue to accept nominations from Members 
and Member Organizations for specifically designated Member 
Representative Director positions, and the Stockholder will be 
obligated to elect persons on the list of candidates provided by the 
Member Nominating Committee (which list, in the case of a contested 
election, would be those directors that received the most Member 
votes). The Commission notes that the dissolution of the Trust will not 
eliminate or affect the ability of members to nominate and vote for 
Member Representative Directors, nor will it affect the assurance that 
Members' chosen director candidates will be elected to the Board by the 
Stockholder. The Commission believes that the proposed nomination 
process for Member Representative Directors, similar to that of NASDAQ, 
would provide Members and Member Organizations with fair representation 
in the selection of certain Directors of the Exchange in accordance 
with the Act.
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    \71\ See Securities Exchange Act Release No. 53128 (January 13, 
2006), 71 FR 3550, 3553 (January 23, 2006) (File No. 181) (approving 
NASDAQ as a national securities exchange) (``NASDAQ Approval 
Order'').
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    The Commission notes that the revised LLC Agreement and By-Laws 
will require the Board to include Public,\72\ Non-Industry,\73\ and 
Member Representative Directors,\74\ the latter of which will continue 
to comprise at least 20% of the Board. The Commission has previously 
noted that, consistent with Section 6(b)(3) of the Act,\75\ the 
selection of Member Representative Directors helps to ensure that an 
exchange's members have a voice in the governing body of the exchange 
and the corresponding exercise by the exchange of its self-regulatory 
authority, and that the exchange is administered in a way that is 
equitable to all who trade on its market or through its facilities.\76\ 
Further, the composition of the Board will continue to satisfy the 
requirements of Section 6(b)(3) of the Act by requiring that one or 
more directors be representative of issuers and investors and not be 
associated with a member of the Exchange, broker, or dealer.
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    \72\ A Public Director has no material business relationship 
with a broker or dealer, the Exchange or its affiliates, or FINRA.
    \73\ A Non-Industry Director is a Public Director; an officer, 
director, or employee of an issuer of securities listed on the 
national securities exchange operated by the Exchange; or any other 
individual who would not be an Industry Director.
    \74\ A Member Representative Director is elected or appointed 
after having been nominated by the Member Nominating Committee or by 
a Member pursuant to the By-Laws, and he or she may, but is not 
required to be, an officer, director, employee, or agent of a 
Member.
    \75\ 15 U.S.C. 78f(b)(3).
    \76\ See NASDAQ Approval Order, supra note 71, 71 FR at 3553.
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    The Exchange also proposes to adopt a provision that allows for the 
removal of a Director with cause (e.g., where the Director no longer 
satisfies the classification for which the Director was elected or the 
Director's continued service as such would violate the compositional 
requirements of the Board). The Commission finds that such removal for 
cause is consistent with the Act in that it is identical to a NASDAQ 
provision previously approved by the Commission, and is designed to 
ensure that the Board continues to satisfy compositional requirements 
consistent with Section 6(b)(3) of the Act.\77\ In addition, the 
Exchange proposes to amend its By-Laws so that the Stockholder would 
fill a vacancy of a Member Representative Director on the Board with a 
person from a list of candidates prepared by the Member Nominating 
Committee. Currently, such vacancies may be filled only upon a majority 
vote by the Board of Governors.\78\ This change is intended to 
replicate a NASDAQ provision previously approved by the Commission, and 
is consistent with the Act in that it is designed to ensure that the 
Board continues to satisfy compositional requirements, particularly 
those concerning fair

[[Page 24074]]

representation.\79\ The Commission believes that Phlx's revised 
governing documents, as proposed, will continue to provide for the fair 
representation of Phlx Members and Member Organizations and also will 
provide board qualification requirements that are consistent with the 
Act and consistent with those that have been approved previously by the 
Commission for NASDAQ.
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    \77\ Id.
    \78\ The vacancy could remain unfilled if the term of the vacant 
Director position is less than six months.
    \79\ See NASDAQ Approval Order, supra note 71, 71 FR at 3553.
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    The Commission finds that the Exchange's proposal to modify the 
composition of Business Conduct Committee is consistent with the Act. 
The proposed revisions to the composition of the Business Conduct 
Committee will make it identical to the composition of the equivalent 
NASDAQ committee (the NASDAQ Review Council).\80\ In particular, the 
Exchange proposes to increase the number of Non-Industry and Member 
Representative Directors on the committee as well as require the 
Business Conduct Committee to be comprised of a number of Member 
Representative Directors that equals at least 20% of the total number 
of members of the committee.\81\
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    \80\ See id. at 3554 (``The Commission believes that [NASDAQ's] 
proposed committees should enable it to carry out its 
responsibilities under the Exchange Act.''). See also Notice, supra 
note 3, 76 FR at 12187.
    \81\ Currently, the Business Conduct Committee is required to 
have not less than one Member who conducts options business at the 
Exchange, which would provide less than 20% member representation if 
the committee had more than five members.
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    In addition, other proposed changes to the Exchange's committees 
will not materially affect the compositional requirements that are 
currently in place. For example, the Quality of Markets and Market 
Operations Review Committees are currently, and will remain, subject to 
the same compositional requirement for Member Representative Directors, 
and the Regulatory Oversight Committee will continue to be comprised of 
Public Directors. According to the Exchange, these compositional 
requirements are designed to foster the Exchange's ability to protect 
the public interest and foster the integrity of the Exchange by 
bringing a unique, unbiased perspective to these committees and the 
work that they perform. Among other things, the Exchange intends for 
these changes to increase representation of Non-Industry Directors on 
the committees. The Commission notes these proposed changes are 
designed to align Phlx's compositional requirements with those of its 
affiliated exchange, NASDAQ, which were previously approved by the 
Commission.\82\
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    \82\ See NASDAQ Approval Order, supra note 71, 71 FR at 3554.
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    The Commission finds that the Exchange's proposal to eliminate FCO 
Participations is also consistent with the Act. Importantly, the 
Exchange represents that it currently does not have any persons who 
access the Exchange's FCO market exclusively through an FCO 
Participation, as such participations are no longer utilized on the 
Exchange in light of the ability, since the Exchange demutualized, of 
any permit holder to trade FCO Participations by means of a general 
all-purpose trading permit. As a result, the Commission believes that 
the elimination of FCO Participations will not adversely impact the 
ability of market participants to continue to access and trade on the 
Exchange FCO market.
    The Commission believes that the remaining revisions to the LLC 
Agreement, By-Laws, Rules, Advices, and Regulations, including those 
related to the Exchange's organizational structure, renaming the Board 
of Governors the Board of Directors, and identifying NASDAQ OMX as the 
single Stockholder, are consistent with the Act and are designed to 
update the Exchange's governance process and create equivalent 
governing standards between Phlx and NASDAQ, which are both controlled 
by NASDAQ OMX. The proposed changes are designed to conform certain 
Phlx provisions to more closely parallel provisions maintained by 
NASDAQ that were previously approved by the Commission.
    Finally, the Exchange's proposed conforming changes to various 
provisions of the LLC Agreement, By-Laws, Rules, Advices, and 
Regulations to amend cross references, update terminology, and rename 
and renumber sections are consistent with the Act and are intended to 
make non-material revisions to update and correct various outdated 
references. For example, the revisions to eliminate references to FCO 
Participations and to XLE, as well as other now-obsolete terms are 
reasonable and are not intended to constitute a material or substantive 
change to any provision. The Commission finds that these changes are 
technical in nature and will provide clarity to the Exchange's LLC 
Agreement, By-Laws, Rules, Advices, and Regulations.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\83\ that the proposed rule change (SR-Phlx-2011-13), as modified 
by Amendment No. 1, be, and hereby is, approved.
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    \83\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\84\
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    \84\ 17 CFR 200.30-3(a)(12).
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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-10362 Filed 4-28-11; 8:45 am]
BILLING CODE 8011-01-P


