[Federal Register: March 23, 2006 (Volume 71, Number 56)]
[Notices]
[Page 14766-14769]
[DOCID:fr23mr06-85]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53518; File No. SR-Phlx-2005-93]

Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.;
Notice of Filing of Proposed Rule Change and Amendments Nos. 1, 2, 3, 4
and 5 Thereto To Amend Its By-Laws and Charter in Connection With a
Restructuring of Its Board of Governors

March 20, 2006.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on December 30, 2005, the Philadelphia Stock Exchange, Inc. (``Phlx''
or ``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I and
II below, which items have been prepared by the Phlx. On February 16,
2006, the Exchange filed Amendment No. 1 to the proposed rule change;
\3\ on March 10, 2006, the Exchange filed Amendment No. 2 to the
proposed rule change; \4\ on March 17, 2006, the Exchange filed
Amendment No. 3 to the proposed rule change; \5\ and on March 20, 2006,
the Exchange filed Amendment Nos. 4 \6\ and 5 \7\ to the proposed rule
change. The Commission is publishing this notice to solicit comments on
the proposed rule change, as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, the Phlx revised the proposed
definitions of the terms ``Independent'' and ``Material
Relationship'' that are to be included in the Exchange's By-Laws and
made clarifying changes to the purpose section and to the rule text
of the proposed rule change.
    \4\ In Amendment No. 2, the Phlx incorporated the proposed
definition of ``Independent Governor'' in the Exchange's Restated
Certificate of Incorporation (``Charter''); incorporated the
definition of ``Annual Independence Review'' in the Exchange's By-
Laws; revised the rule text to clarify the standards to be applied
by the Nominating, Elections and Governance Committee in evaluating
nominees for Independent Governor; described in the purpose section
of the proposed rule change the selection criteria for the position
of Vice-Chairman; and made clarifying changes to the rule text.
    \5\ In Amendment No. 3, the Phlx revised the purpose section and
the rule text of the proposed rule change to set forth that the
Nominating, Elections and Governance Committee shall be composed of
five persons as follows: Three Independent Governors (one of whom
must be a Designated Independent Governor), one Stockholder
Governor, and one Member Governor.
    \6\ In Amendment No. 4, the Phlx deleted revisions, as proposed
in the original filing, that would have capitalized the term
``member'' in various Charter provisions and reinstated in the
Charter a reference to ``member (as such term is defined in the
Exchange Act).''
    \7\ In Amendment No. 5, the Phlx revised the statutory basis
section of the proposed rule change.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

    The Exchange proposes to amend its By-Laws and Charter to revise
the current structure of the Phlx Board of Governors (``Board'').
Specifically, the Exchange proposes to: (i) Voluntarily conform to
certain aspects of the Commission's proposed SRO Governance Rulemaking,
including the incorporation of the concept of ``independent
directors;'' \8\ (ii) create a single Vice-Chairman of the Board; (iii)
eliminate the distinction between On-Floor and Off-Floor Governors;
(iv) make changes to the election of Governors in the By-Laws and
Charter; and (v) make other modifications, including revising the
composition of various Phlx standing committees. The text of the
proposed rule change, as amended, is available at the Commission's
Public Reference Room, at the Exchange's Web site (http://www.phlx.com)

and at the Exchange's principal office.
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    \8\ See Securities Exchange Act Release No. 50669 (November 18,
2004), 69 FR 71126 (December 8, 2004) (``Proposed SRO Governance
Rulemaking'').

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II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Phlx included statements
concerning the purpose of, and basis for, the proposed rule change, as
amended, and discussed any comments it received on the proposed rule
change. The text of these statements may be examined at the places
specified in Item IV below. The Exchange has prepared summaries, set
forth in Sections A, B and C below, of the most significant aspects of
such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of the proposed rule change is to address various
governance issues in both the Exchange's By-Laws and Charter.

Conformance to Certain Aspects of the Proposed SRO Governance
Rulemaking

    One purpose of the proposed rule change is to amend the Exchange's
By-Laws and Charter to voluntarily conform to certain aspects of the
Proposed SRO Governance Rulemaking, including the concept of
``independent directors'' as set forth in the proposed rulemaking.\9\
The Exchange proposes to convert all non-industry \10\ positions to
independent positions and to add an additional Independent Governor to
ensure a majority of Independent Governors in accordance with the
Proposed SRO Governance Rulemaking.\11\ 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. A
material relationship would be defined as a relationship, compensatory
or otherwise, that reasonably could affect the independent judgment or
decision-making of a Governor. The Board would make this independence
determination upon a Governor's nomination and no less frequently than
annually and as often as necessary in light of a Governor's
circumstances and pursuant to Article IV, Section 4-4 of the Phlx By-
Laws to ensure that the status of all incumbent Independent Governors
do not fall outside the definition of Independent.\12\ The designation
of ``Independent'' would replace the defined terms ``public'' \13\ and
``non-industry,'' as presently set forth in the Phlx's By-Laws and
Charter. Currently, the Board consists of 22 Governors.\14\ Under this
proposal, the Board would consist of 23 Governors. Accordingly, the
Board would consist of a majority of Independent Governors.
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    \9\ See id.
    \10\ Currently, ``non-industry'' is defined as follows: The term
non-industry when used in the context of Governors or committee
members shall mean (a) public Governors; (b) officers and employees
of issuers of securities listed on the Exchange; (c) persons
affiliated with brokers and dealers that operate solely to assist
the securities-related activities of the business of non-member
affiliates (such as brokers or dealers established to (i) distribute
an affiliate's securities which are issued on a continuous or
regular basis, or (ii) process the limited buy and sell orders of
the shares of employee owners of the affiliate); (d) employees of an
entity that is affiliated with a broker or dealer that does not
account for a material portion of the revenues of the consolidated
entity, and who are primarily engaged in the business of the non-
member entity; and (e) other individuals who would not be industry
Governors or committee members. Phlx By-Laws Article I, Section 1-
1(t).
    \11\ See supra at note 8.
    \12\ ``Independent'' would be defined in the Phlx By-Laws,
Article 1, Section 1-1(o) as follows: The term ``Independent,'' when
used in the context of Governor or Committee Members, shall mean
persons affirmatively determined by the Board as having 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\ ``Public'' is defined in the Phlx By-Laws Article I,
Section 1-1(y) as follows: The term ``public'' when used in the
context of Governors or committee members shall mean non-industry
persons who have no material business relationship with a broker,
dealer or the Exchange.'' The proposed rule change would delete the
definition of ``public'' from the Phlx By-Laws.
    \14\ See Phlx Charter Article Seventh, and Phlx By-Laws Article
IV, Section 4-1.
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Single Vice-Chairman

    The Phlx proposes to amend its By-Laws and Charter to create, in
proposed Phlx By-Laws Article V, Section 5-2, 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
stockholders. The Vice-Chairman would not be subject to a term limit.
The Vice-Chairman would be an individual who, anytime 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. Currently, the
By-Laws require two Vice-Chairmen of the Board, with one Vice-Chairman
elected as an On-Floor Governor by the Members, and the other Vice-
Chairman elected as an Off-Floor Governor by the stockholders. The
Exchange proposes this change to conform to a structure that is more
typical of a for-profit stock corporation and also because the two
Vice-Chairmen model is not sustainable if the ``On-Floor'' and ``Off-
Floor'' distinctions are eliminated, as discussed below.

Elimination of the ``On-Floor'' and ``Off-Floor'' Governor Distinction

    The Exchange proposes to eliminate the distinction between ``On-
Floor'' \15\ and ``Off-Floor'' \16\ Governors, in both its By-Laws and
Charter, to allow for greater stockholder representation and,
specifically, representation on the Board of the six recently acquired
strategic investors.\17\ Presently, there are five Off-Floor Industry
Governors elected by the stockholders and five On-Floor Industry
Governors elected by the Members. The Exchange proposes to replace this
current model with nine positions that would consist of six positions
elected by stockholders, two Member positions and one Philadelphia
Board of Trade

(``PBOT'') position. The Member positions and the PBOT position would
be elected by Members of the Exchange.
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    \15\ Phlx By-Laws Article IV, Section 4-1 provides that an ``On-
Floor Governor'' is ``an industry Governor and is a member primarily
engaged in business on the Exchange's Equity Floor or a general
partner, executive officer (vice president and above) or member
associated with a member organization primarily engaged in business
on the Exchange's Equity Floor (On-Floor Equity Governor) * * *
[and] is an industry Governor and is a member of the Philadelphia
Board of Trade (On-Floor PBOT Governor) * * * [and] is an industry
Governor and is a member primarily engaged in business as a
specialist on the Exchange's Equity Options Floor or a general
partner, executive officer (vice president and above) or a member
associated with a member organization primarily engaged in
specialist business on the Exchange's Equity Options Floor (On-Floor
Equity Options Specialist Governor) * * * [and] is an industry
Governor and is a member primarily engaged in business as a
registered options trader on the Exchange's Equity Options Floor or
a general partner, executive officer (vice president and above) or a
member associated with a member organization primarily engaged in
registered options trader business on the Exchange's Equity Options
Floor (On-Floor Equity Options Registered Options Trader Governor);
and * * * who is an industry Governor and is a member primarily
engaged in business on the Exchange's Equity Options Floor as a
floor broker (On-Floor Equity Options Broker Governor).''
    \16\ Phlx By-Laws Article IV, Section 4-1 provides that ``Off-
Floor Governors'' are ``industry Governors and general partners,
executive officers (vice president or above), or members or
participants associated with member or participant organizations
which conduct a non-member or non participant public customer
business and shall individually not be primarily engaged in business
activities on the Exchange Floor.''
    \17\ During 2005, six firms invested in the Exchange: Citigroup
Financial Products, Inc.; Credit Suisse First Boston NEXT Fund,
Inc.; Morgan Stanley & Co., Inc., UBS Securities LLC; Citadel
Derivatives Group, LLC; and Merrill Lynch, Pierce Fenner & Smith,
Inc.
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Election of Governors

    The Exchange proposes to amend its By-Laws and Charter to reflect
that two of the Independent Governors will be nominated and elected by
the Members of the Exchange, as will both Member Governors and the PBOT
Governor, in order to maintain the 20% fair representation of
membership on the Board.\18\ The Exchange represents that the proposed
amendments to its Charter and By-Laws, in and of themselves, would
require minimal changes to the present composition of the Board,
subject to a formal analysis and determination by the Board of the
qualifications of the Independent Governors, and would be largely a
reclassification of Board positions.
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    \18\ See Section 6(b)(3) of the Act, 15 U.S.C. 78f(b)(3). See
also Proposed SRO Governance Rulemaking. The Exchange states that it
is proposing to voluntarily adopt certain concepts addressed in the
Commission's Proposed SRO Governance Rulemaking.
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    The Exchange would conform the composition of the Board to the
provisions of the proposed rule change as follows: upon the approval of
the proposed rule change by the Commission, the Exchange will hold an
Annual Meeting of Member and Member Organizations, to be followed by
the Annual Meeting of Stockholders to elect the class of Governors for
2006. The class of 2006 Governors will be nominated and elected
pursuant to the Charter and By-Laws, as proposed to be amended, with
two of the nine Board positions being nominated and selected by the
Members and elected by the Trustee of the Series Class A Preferred
Stock. The classes of 2007 and 2008 Governors will be permitted to
complete their terms but will be appointed by the Nominating, Elections
and Governance Committee, with the approval of the Board, to fill the
new positions established by the amendments until which time those
positions come up for election in either 2007 and 2008
respectively.\19\ Following the election of the class of 2006, over 20%
of the Governors serving on the Board will have been nominated and
elected by the Members.
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    \19\ See Phlx By-Laws Article IV, Section 4-7.
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Stockholder Meetings

    With regard to its Charter, the Phlx seeks to remove Article Ninth
to allow greater flexibility in the Exchange's governance processes. In
the absence of this Article, the issue of obtaining the written consent
of the stockholders of the Exchange for any action in lieu of a meeting
will be governed by Delaware General Corporation Law, which will allow
stockholders to take actions outside of a stockholder meeting by less-
than-unanimous written consent.

Other Modifications

    To conform with the proposed changes to the Board's composition
described above, the Exchange also proposes to amend its By-Laws and
Charter sections relating to Board Committees as follows: \20\
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    \20\ The Exchange notes that no changes are being made to Phlx
By-Laws Article X, Section 10-9, its Audit Committee provision. The
Commission recently approved a proposed rule change to amend this
provision of the Phlx By-Laws to require, among other things, that
the members of the Audit Committee be ``Independent Governors.'' See
Securities Exchange Act Release No. 53356 (February 23, 2006), 71 FR
10741 (March 2, 2006) (SR-Phlx-2004-37).
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     The following committees are not affected by the changes
described herein with the exception of minor technical modifications:
    [cir] Admissions
    [cir] Options Allocation, Evaluation and Securities Committee
    [cir] Equity Allocation Evaluation and Securities Committee
    [cir] Floor Procedure
    [cir] Foreign Currency Options
    [cir] Marketing
    [cir] Options
    [cir] The Automation Committee currently allows for the Chairman of
the Committee to be designated as a Non-Industry or Off-Floor Governor.
The proposal would change this designation to a Stockholder or
Independent Governor.
    [cir] The Business Conduct Committee is currently composed of three
Non-Industry Governors (one of whom must be Public); one Equity Floor
Member; one Equity Options Floor Member; one At-Large Floor Member; and
three Off-Floor Members. The proposal would modify the composition as
follows: Three Independent Governors; four Members or persons
associated with a Member Organization; one Member who primarily
conducts business on the Equity Floor; and one Member who primarily
conducts business on the Equity Options Floor.
    [cir] The Compensation Committee is currently composed of one
Chairman (who must be a Non-Industry Governor); two Non-Industry
Governors (one of whom must be a Public Governor); and the two Vice-
Chairmen of the Board. The proposal would modify the composition as
follows: Four Independent Governors (one of whom must serve as chairman
of the committee) and the Vice-Chairman of the Board.
    [cir] The Executive Committee is currently composed of the Chairman
of the Board; the two Vice-Chairmen of the Board; the Chairman of the
Finance Committee; one Chairman of a floor committee not represented by
the On-Floor Vice-Chairman; one Chairman of a floor committee not
represented by the Off-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 composition 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.
    [cir] The Finance Committee is currently composed as follows: the
Chairman of the Board; the two Vice-Chairmen of the Board; one On-Floor
Member (who may be a Governor); one Off-Floor Member (who may be a
Governor); and four Non-Industry Governors (one whom must be a Public
Governor). The proposal would modify the composition as follows: the
Chairman and Vice-Chairman of the Board; two Members or persons
associated with a Member Organization, who may be Governors (one of
whom conducts business primarily on the Equity or Equity Options
Floor); one Stockholder Governor; and four Independent Governors. The
Chairman of this committee would be the Vice-Chairman of the Board, a
Stockholder Governor or a Member Governor.
    [cir] The Nominating and Elections Committee would be renamed the
Nominating, Elections and Governance Committee. The purpose of this
change is to have the Committee's name more properly reflect the
existing role and function of this Committee. No substantive changes in
the Committee's functions are proposed. The Nominating and Elections
Committee is currently composed of the following: The Chairman (who
must be a Non-Industry 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. The proposal would
modify the composition as follows: Three Independent Governors (one of
whom must be a Designated Independent Governor); one Stockholder
Governor; and one Member Governor. The Nominating, Elections and
Governance Committee would select its Chairman from among the members
of such Committee who are Independent Governors. Constituted in this
manner, the interests of the Members of the Exchange, by virtue of

the Member Governor and the Designated Independent Governor who are
both elected by the Members, would be represented by at least 20% of
the Committee in compliance the fair representation requirement of
Section 6(b)(3) of the Act.\21\
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    \21\ 15 U.S.C. 78f(b)(3).
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    [cir] The Quality of Markets Committee would not change in any way,
except that ``Non-Industry Governors'' would be called ``Independent
Governors'' and ``Industry Governors'' would be called ``Stockholder
Governors.''
    In addition, various technical modifications have been made to the
Phlx By-Laws for purposes of consistency.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section
6(b) of the Act \22\ in general, and furthers the objectives of Section
6(b)(3) of the Act \23\ in particular, in that it is designed to assure
a fair representation of its members in the selection of its directors
and administration of its affairs because the members will elect five
Designated Governors, including two Designated Independent Governors,
one PBOT Governor, and 2 Member Governors. The Exchange also believes
that its proposal furthers the objectives of Section 6(b)(3) of the Act
\24\ because the Nominating, Elections and Governance Committee will
consist of three Independent Governors (one of whom must be a
Designated Independent Governor), one Stockholder Governor, and one
Member Governor, with the Designated Independent Governor elected by
the Members, ensuring greater Member representation.
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    \22\ 15 U.S.C. 78f(b).
    \23\ 15 U.S.C. 78f(b)(3).
    \24\ 15 U.S.C. 78f(b)(3).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change would
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others

    No written comments were either solicited or received by the
Exchange.

III. Date of Effectiveness of the Proposed Rule

    Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
    (A) By order approve such proposed rule change; or
    (B) Institute proceedings to determine whether the proposed rule
change should be disapproved.
    The Phlx has requested accelerated approval of the proposed rule
change. While the Commission will not grant accelerated approval at
this time, the Commission will consider granting accelerated approval
of the proposal at the close of the comment period, 21 days from the
date of publication of the proposal in the Federal Register.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change, as amended, is consistent with the Act. Comments may be
submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or     Send an e-mail to<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 April 13, 2006.

    For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\25\
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    \25\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 06-2857 Filed 3-21-06; 11:52 am]

BILLING CODE 8010-01-P