[Federal Register: May 5, 2006 (Volume 71, Number 87)]
[Notices]
[Page 26589-26592]
[DOCID:fr05my06-144]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53734; File No. SR-Phlx-2005-93]

Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.;
Order Approving a Proposed Rule Change and Amendment Nos. 1, 2, 3, 4,
and 5 Thereto, and Notice of Filing and Order Granting Accelerated
Approval to Amendment Nos. 6 and 7, Relating to Amendments to Its By-
Laws and Charter in Connection With a Restructuring of Its Board of
Governors

April 27, 2006.

I. Introduction

    On December 30, 2005, the Philadelphia Stock Exchange, Inc.
(``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 amend its By-laws (``By-
Laws'') and Restated Certificate of Incorporation (``Charter'') to
revise the current structure of the Exchange's Board of Governors
(``Board''). On February 16, 2006, the Exchange filed Amendment No. 1
to the proposed rule change; on March 10, 2006, the Exchange filed
Amendment No. 2 to the proposed rule change; on March 17, 2006, the
Exchange filed Amendment No. 3 to the proposed rule change; and on
March 20, 2006, the Exchange filed Amendment Nos. 4 and 5 to the
proposed rule change.\3\ The proposed rule change was published for
comment in the Federal Register on March 23, 2006.\4\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ For a brief description of these amendments, see Securities
Exchange Act Release No. 53518 (March 20, 2006), 71 FR 14766 (March
23, 2006) (``Notice''), at notes 3 through 7, inclusive.
    \4\ See Notice.
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    The Commission received no comments on the proposal. On April 25,
2006, the Exchange filed Amendment No. 6 to the proposed rule
change,\5\ and on April 27, 2006, the Exchange filed Amendment No. 7 to
the proposed rule change.\6\ This order approves the proposed rule
change, as amended by Amendment Nos. 1, 2, 3, 4, and 5. Simultaneously,
the Commission provides notice of filing of Amendment Nos. 6 and 7, and
grants accelerated approval of Amendment Nos. 6 and 7.
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    \5\ In Amendment No. 6, the Exchange consolidated the rule text
of the proposed rule change, as revised by prior amendments, into a
single document; revised the proposed definition of ``Stockholder
Governor'' in the Charter and By-Laws to clarify its meaning; and
made minor revisions and clarifying changes to the rule text and
purpose section of the filing. Amendment No. 6 superseded and
replaced the proposed rule change, as amended, in its entirety.
    \6\ In Amendment No. 7, the Exchange proposed to change the word
``affiliation'' to ``relationship'' in the proposed definition of
``Material Relationship;'' incorporated the portion of the statutory
basis section of the filing that was inadvertently omitted in
Amendment No. 6, and made other technical changes to the proposed
rule text.
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II. Description of the Proposal

    The proposed rule change, as amended, would revise both the
Exchange's By-Laws and Charter to restructure the composition of the
Board and certain Board committees. Specifically, the proposed rule
change would create a majority independent Board; adopt definitions of
``Independent'' and ``Independent Governor'' and adopt independence
determination standards based principally on the Commission's proposed
SRO governance rulemaking; \7\ convert all Non-Industry \8\ Governor
positions on the Board to Independent Governor positions and add an
additional Independent Governor; eliminate the positions of On-Floor
and Off-Floor Governors \9\ and create Member Governor and Stockholder
Governor positions; \10\ revise the categories of Governors that are
elected by Phlx members; \11\ reduce the number of Vice-Chairmen of the
Board from two to one and adopt new criteria for selecting the Vice-
Chairman; and make other revisions, including with respect to the
composition of various Board standing committees.
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    \7\ See Securities Exchange Act Release No. 50669 (November 18,
2004), 69 FR 71126 (December 8, 2004) (``Proposed SRO Governance
Rulemaking'').
    \8\ See Phlx By-Laws Article I, section 1-1(t) for a definition
of ``non-industry'' when used in the context of Governors or
committee members.
    \9\ See Phlx By-Laws Article IV, section 4-1 for a discussion of
On-Floor and Off-Floor Governors.
    \10\ See proposed Phlx By-Laws Article I, Sections 1-1(u)
(defining ``Member Governor'') and 1-1(hh) (defining ``Stockholder
Governor'').
    \11\ See infra note 17 and accompanying text.
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A. Board Composition

    Currently, the Board consists of 22 Governors: The Chairman of the
Board, who is the Chief Executive Officer of the Exchange; 11 Non-
Industry Governors (including at least five Public

Governors); \12\ five On-Floor Governors; and five Off-Floor Governors.
The Exchange has proposed to increase the number of Governors to 23 and
to revise the composition of the Board to consist of: the Chairman of
the Board, who is the Chief Executive Officer of the Exchange; 12
Independent Governors; six Stockholder Governors; two Member Governors;
one Philadelphia Board of Trade (``PBOT'') Governor; and one Vice-
Chairman.
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    \12\ See Phlx By-Laws Article I, section 1-1(y) for a definition
of ``public'' when used in the context of Governors or committee
members.
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1. Majority Independent Board
    The Exchange proposes to convert all Non-Industry and Public
Governor positions to Independent Governor positions and to add an
additional Independent Governor, for a total of 12 Independent
Governors. Under the proposal, an ``Independent Governor'' would be
defined as a Governor who has no Material Relationship with the
Exchange or any affiliate of the Exchange, any member of the Exchange
or any affiliate of such member, or any issuer of securities that are
listed or traded on the Exchange or a facility of the Exchange.\13\
``Material Relationship'' would be defined as a relationship,
compensatory or otherwise, that could reasonably affect the independent
judgment or decision-making of a Governor.\14\ The proposed rule change
would require the Nominating, Elections and Governance Committee first
to ascertain that candidates for Independent Governor positions are
qualified under the proposed definition of ``Independent'' prior to
nominating them,\15\ and then would require the Board to make
subsequent independence determinations following an Independent
Governor's nomination at least annually, and as often as necessary in
light of a Governor's circumstances.\16\
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    \13\ See proposed Phlx By-Laws Article I, sections 1-1(o) and
(p). See also proposed Phlx Charter Article FOURTH (b)(iii)(A).
    \14\ See proposed Phlx By-Laws Article I, section 1-1(s).
    \15\ See proposed changes to Phlx By-Laws Article III, section
3-4(a) and Article XXVIII, Section 28-3(c).
    \16\ See proposed ``Annual Independence Review'' in the Phlx By-
Laws Article IV, section 4-4(b).
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2. Designated Governors
    The Exchange proposes to replace the five On-Floor Governor
positions with five Designated Governor positions. The ``Designated
Governors'' would consist of the two Member Governors, the two
Designated Independent Governors, and the one PBOT Governor.\17\ A
``Member Governor'' is defined as 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 one of the two (2)
vacancies on the Board of Governors allocated to Member Governors.\18\
The ``Designated Independent Governors'' are the two Independent
Governors who are elected by the Phlx members.\19\ The ``PBOT
Governor'' is a Governor who is a member of the PBOT and is duly
elected to fill the one (1) vacancy on the Board allocated to the PBOT
Governor.
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    \17\ At the annual meeting of members and member organizations,
member organization representatives elect the Designated Governors,
who are then elected at the annual stockholders meeting by the
holder of the Series A Preferred Stock. See Phlx By-Laws, Article
III, section 3-2(a) and Article XXVIII, section 28-2.
    \18\ See proposed Phlx By-Laws Article I, section 1-1(u).
    \19\ The former 11 Non-Industry Governors were elected by the
holders of the Exchange's Common Stock. Under the proposed rule
change, two of the 12 Independent Governors would be Designated
Independent Governors and would be elected by Phlx members and
member organizations, through their respective member organization
representatives, but the other 10 Independent Governors would be
elected by the holders of the Exchange's Common Stock. See
discussion infra sections II.A.3 and III.
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3. Stockholder Governors
    The Exchange also proposes to replace the five Off-Floor Governor
positions with six Stockholder Governor positions. The Stockholder
Governors would be elected by the holders of the Exchange's Common
Stock. A ``Stockholder Governor'' is defined as a Governor who is a
holder of Class A or Class B Common Stock in the Exchange or an
officer, director (or a person in a similar position in business
entities that are not corporations), designee or an employee of a
holder of Class A or Class B Common Stock in the Exchange or of any
affiliate or subsidiary of such holder of Class A or Class B Common
Stock and who is duly elected to fill one of the six vacancies on the
Board of Governors allocated to the Stockholder Governors.\20\ In
addition to electing the Stockholder Governors, the Exchange's Common
Stock holders would elect 10 of the 12 Independent Governors.
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    \20\ See Amendment No. 6 (proposing to amend proposed Phlx By-
Laws Article I, section 1-1(hh). See also proposed Phlx Charter
Article FOURTH (b)(iii)(A)).
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4. Single Vice-Chairman of the Board
    Currently, there are two Vice-Chairmen of the Board; one Vice-
Chairman is selected from one of the On-Floor Governors by the member
organization representatives or, if there is no contest between or
among Floor Governors, by the Board, and one Vice-Chairman is selected
from one of the Off-Floor Governors by the Board.\21\ The Phlx proposes
to amend its By-Laws to provide for a single Vice-Chairman of the
Board, who would be recommended by the Chairman for nomination by the
Nominating, Elections and Governance Committee and elected by the
holders of Common Stock.\22\ The Vice-Chairman would serve as a
Governor and would not be subject to any term limits.\23\ The Vice-
Chairman would be required to be an individual who, within the prior
three years, has been a member primarily engaged in business on the
Exchange's equity market or equity options market, or is a general
partner, executive officer (vice-president or above) or a member
associated with a member organization primarily engaged in business on
the Exchange's equity market or equity options market.\24\
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    \21\ See Phlx By-Laws Article IV, section 4-2.
    \22\ See proposed Phlx By-Laws Article XXVIII, section 28-3(b)
and proposed Phlx Charter Article FOURTH (b)(iii)(A).
    \23\ See proposed Phlx By-Laws Article IV, section 4-3(a).
    \24\ See proposed Phlx By-Laws Article V, section 5-2.
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B. Composition of Board Committees

    The Exchange proposes to revise the composition of certain Board
committees to reflect the proposed Board restructuring.
1. Nominating, Elections and Governance Committee
    Currently, the Phlx's Nominating and Elections Committee is
composed of seven members: The committee Chairman, who must be a Public
Governor; three Non-Industry Governors; one Off-Floor Member, who may
be a Governor; one On-Floor Equity Governor; and one On-Floor Equity
Options Governor.\25\ The Exchange proposes to reduce the size of this
committee to five members, consisting of: three Independent Governors
(one of whom must be a Designated Independent Governor), one Member
Governor, and one Stockholder Governor. The Exchange also proposes to
rename the committee as the ``Nominating, Elections and Governance
Committee.'' The Nominating, Elections and Governance Committee would
select its Chairman from among the members of the committee that are
Independent Governors.
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    \25\ See Phlx By-Laws Article X, section 10-19(a).
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2. Business Conduct Committee
    The Exchange's Business Conduct Committee currently is composed of
nine members: Three Non-Industry

Governors (one of whom must be a Public Governor); one Equity Floor
member; one Equity Options Floor member; one At-Large Floor member; and
three Off-Floor members. The Exchange proposes to modify this
committee's composition to be as follows: Three Independent Governors;
four persons who are either Phlx members or associated with a member
organization; one Phlx member whose business principally is carried out
on the equity floor; and one Phlx member whose business is principally
carried out on the equity options floor.
3. Compensation Committee
    The Phlx's Compensation Committee is composed of five members:
three Non-Industry Governors (one of whom must be a Public Governor)
and the two Vice-Chairmen of the Board. The Chairman of the committee
must be one of the Non-Industry Governors. The proposal would modify
the composition of this committee to be as follows: four Independent
Governors, one of whom must serve as Chairman of the committee, and the
Vice-Chairman of the Board.
4. Executive Committee
    The Exchange's Executive Committee is composed of nine members: The
Chairman of the Board who serves as the committee's chairman; the two
Vice-Chairmen of the Board; the Chairman of the Finance Committee; the
Chairmen of the two floor committees whose floors are not represented
by the On-Floor Vice-Chairman; one Off-Floor Governor; and two Non-
Industry Governors, one of whom must be a Public Governor. The proposal
would modify the committee's composition to be as follows: the Chairman
of the Board; the Vice-Chairman of the Board; two Stockholder
Governors; two Independent Governors; the Chairman of the Finance
Committee; and two Chairmen of floor committees.
5. Quality of Markets Committee
    The Exchange proposes to modify the composition of the Quality of
Markets Committee. Specifically, the Exchange proposes to convert all
Non-Industry committee member positions to Independent committee member
positions and all Industry committee member positions to Stockholder
and Member committee member positions. The Quality of Markets Committee
would be required to include as many Independent committee members as
it does Stockholder and Member committee members.

C. Other Changes

    The Exchange also proposes to make other changes to its Charter and
By-Laws. The Exchange proposes to remove the requirement in Article
NINTH of its Charter that any action required or permitted to be taken
at any meeting of the Exchange's stockholders may be taken without a
meeting, without prior notice and without a vote, only with the
unanimous written consent of all the stockholders entitled to vote
thereon. The default provision in the Delaware General Corporate Law
statute would apply instead.\26\ The Exchange also made minor and/or
clarifying changes to its By-Laws.\27\
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    \26\ Under title 8, section 228(a) of the Delaware Code, unless
otherwise provided in a company's certificate of incorporation, any
action that may be taken at a stockholders meeting may be taken
without a meeting, without prior notice, and without a vote, upon
the written consent of at least the minimum number of votes that
would be necessary to take such action at a meeting if all the
shares entitled to vote thereon were present and voted.
    \27\ These minor changes include capitalizing certain defined
terms (``Stockholder,'' ``Member,'' ``Member Organization'') and
providing a more specific a citation to its arbitration rules.
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D. Transition Period

    The Exchange represents that the proposed amendments to its Charter
and By-Laws would require minimal changes to the existing composition
of the Board, subject to a formal analysis and determination by the
Board of the qualifications of the Independent Governors, and would
largely result in a reclassification of current Board positions. The
Exchange further represents that, upon approval of the proposed rule
change, it intends to hold the annual meeting of its members and member
organizations, followed by the annual meeting of its stockholders, in
order to elect the class of 2009 Governors. The class of 2009 Governors
would be nominated and elected pursuant to the new requirements of the
amended Charter and By-Laws. The Exchange would permit the current
classes of 2007 and 2008 Governors to complete their terms, but would
have the Nominating, Elections and Governance Committee, with the
Board's approval, appoint such Governors to fill the new positions
established by the amended Charter and By-Laws until the expiration of
their terms in 2007 and 2008, respectively.

III. Discussion and Commission Findings

    After careful consideration, the Commission finds that the proposed
rule change, as amended, is consistent with the requirements of the Act
and the rules and regulations thereunder applicable to a national
securities exchange.\28\ In particular, the Commission finds that the
proposed rule change is consistent with the requirements of section
6(b)(3) of the Act, which provides that the rules of an exchange must
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 issues and investors and not
be associated with a member of the exchange, broker, or dealer.\29\
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    \28\ 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).
    \29\ 15 U.S.C. 78f(b)(3).
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    The Phlx's Board of Governors currently is composed of the Chairman
of the Board (who must be the Exchange's Chief Executive Officer) and
21 other Governors. By adding a new Governor position, which would be
classified as an Independent Governor position, the Exchange would
create a Board that is composed of a majority of Independent Governors,
i.e., 12 of the 23 Governors on the Board would have to satisfy the
proposed independence standards. The Nominating, Elections and
Governance Committee would be required to evaluate whether potential
candidates for the Independent Governor positions satisfy the
Exchange's independence criteria prior to nominating such candidates
for election. Moreover, upon an Independent Governor's election, the
Board would be required to reassess such Governor's independence at
least annually and as often as necessary in light of such Governor's
circumstances. The Commission believes that the majority independent
Board should help the Exchange mitigate any conflicts of interest that
may arise when persons with a nexus to the Exchange are involved in key
decisions.\30\ Furthermore, the proposal to conduct periodic
independence determinations should help ensure that the Exchange's
independence standards are maintained during an Independent Governor's
tenure on the Board.
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    \30\ The Commission notes that the Phlx's proposals to create a
majority independent Board, to impose independence criteria for the
majority of its Governors and to assess periodically the
independence determinations for those Governors are consonant with
similar provisions in the Proposed SRO Governance Rulemaking. The
Commission notes, however, that the Exchange may be required to make
additional changes to further strengthen its governance structure,
depending upon the results of this rulemaking.
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    Currently, the five Governors elected by Phlx members, through
their member organization representatives, consist of

the four On-Floor Governors and one Industry Governor who is a member
of PBOT. The Exchange proposes to revise the categories of Governors
who are elected by members to consist of two Member Governors, one PBOT
Governor, and two Designated Independent Governors (collectively, the
Designated Governors). Although the proposal would reduce from four to
two the number of Governors who are Phlx members and are elected by the
Exchange's membership, it would add two Designated Independent
Governors to be elected by Phlx members. Accordingly, it would not
reduce the number of Governors elected by Phlx members. Moreover, the
proposal would not alter the right of Phlx members to submit
independent nominations for the Designated Governor positions.
    In addition, the Exchange proposes to revise the composition of its
Nominating, Elections and Governance Committee. This committee
currently is composed of seven members, two of whom are On-Floor
Governors and thus are elected by Phlx members. Under the Exchange's
proposal, the committee would consist of five members, two of whom must
be a Designated Independent Governor and a Member Governor. The
Exchange also proposes revisions to the composition of its Business
Conduct Committee by requiring three of its nine members to be
Independent Governors, four committee members to be Phlx members or
persons associated with a member organization, one committee member to
be a Phlx member who primarily conducts business on the Phlx's equity
floor, and one committee member to be a Phlx member who primarily
conducts business on the equity options floor.
    In the Commission's view, the revisions to the composition of the
Board, the Nominating, Elections and Governance Committee, and the
Business Conduct Committee provide for the fair representation of
members in the selection of the Exchange's directors and the
administration of its affairs, consistent with the requirements of
section 6(b)(3) of the Act.\31\
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    \31\ 15 U.S.C. 78f(b)(3).
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    The Commission finds good cause to approve Amendment Nos. 6 and 7
to the proposed rule change prior to the 30th day after the amendment
is published for comment in the Federal Register. In Amendment No. 6,
the Exchange proposes to incorporate the proposed definitions of
``Member Organization,'' ``Vice-Chairman,'' ``Material Relationship,''
and ``Stockholder'' as contained in the Phlx By-Laws into Article
FOURTH of its Charter because these terms are used throughout the Phlx
Charter. In Amendment No. 6, the Exchange also proposes to revise the
definition of ``Stockholder Governor'' to clarify the categories of
persons eligible to serve as a Stockholder Governor. In Amendment No.
7, the Exchange proposes to change the word ``affiliation'' in the
proposed definition of ``Material Relationship'' to ``relationship''
and to incorporate the portion of text in the statutory basis section
of the proposed rule change that was inadvertently omitted in Amendment
No. 6. In both Amendment Nos. 6 and 7, the Exchange proposes other
minor revisions that are technical in nature and do not affect the
substance of the proposed rule change.
    The Commission believes that the proposed revisions made by
Amendment Nos. 6 and 7 clarify the proposed rule change, as amended,
and do not change its substance. Accordingly, the Commission finds good
cause to accelerate approval of Amendment Nos. 6 and 7.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether Amendment Nos. 6
and 7 are 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<EMAIL_ADDRESS>Please include

File No. SR-Phlx-2005-93 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.

All submissions should refer to File Number SR-Phlx-2005-93. 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 Commissions 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 the
Phlx. 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-
Phlx-2005-93 and should be submitted by May 26, 2006.

V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the
Exchange Act,\32\ that the proposed rule change (SR-Phlx-2005-93), as
amended by Amendment Nos. 1, 2, 3, 4, and 5, be, and hereby is,
approved and that Amendment Nos. 6 and 7 to the proposed rule change
be, and hereby are, approved on an accelerated basis.
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    \32\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\33\
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    \33\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
 [FR Doc. E6-6776 Filed 5-4-06; 8:45 am]

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