[Federal Register: September 29, 2005 (Volume 70, Number 188)]
[Notices]
[Page 56949-56961]
[DOCID:fr29se05-82]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52497; File No. SR-PCX-2005-90]

Self-Regulatory Organizations; Pacific Exchange, Inc.; Order
Granting Approval of Proposed Rule Change and Amendment No. 1 Thereto
and Notice of Filing and Order Granting Accelerated Approval to
Amendment No. 2 to the Proposed Rule Change To Amend the Certificate of
Incorporation of PCX Holdings, Inc., PCX Rules, and the Bylaws of
Archipelago Holdings, Inc. in Relation to the Acquisition of PCX
Holdings by Archipelago Holdings

September 22, 2005.

I. Introduction

    On August 1, 2005, the Pacific Exchange, Inc. (``PCX'' or the
``Exchange'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934, as amended (``Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to amend the certificate of
incorporation of PCX Holdings, Inc. (``PCXH''), the PCX rules, and the
bylaws of Archipelago Holdings, Inc. (``Archipelago'') in relation to
the acquisition of PCXH by Archipelago. On August 10, 2005, the
Exchange filed Amendment No. 1 to the proposed rule change. The
proposed rule change, as amended, was published for comment in the
Federal Register on August 18, 2005.\3\ The Commission received one
comment on the proposal.\4\ On September 16, 2005, the Exchange filed
Amendment No. 2 (``Amendment No. 2'') to the proposed rule change.\5\
This order approves the proposed rule change, grants accelerated
approval to Amendment No. 2 to the proposed rule change, and solicits
comments from interested persons on Amendment No. 2.
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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. 52249 (August 12,
2005), 70 FR 48611 (``Notice'').
    \4\ See electronic mail sent to the Division of Enforcement and
the Division of Market Regulation on September 13, 2005 from ``A
Concerned Stakeholder.''
    \5\ In Amendment No. 2, the Exchange: (1) Revised its Form 19b-4
to reflect actions by the stockholders of PCXH approving the Merger
Agreement (as defined below) on September 13, 2005, thereby
completing the last necessary corporate action; (2) made certain
technical, non-substantive corrections to the text of the proposed
rule change; (3) clarified the scope of the term ``real-time market
surveillance'' in its discussion of the scope of the regulatory
agreement between PCX and NASD pursuant to Rule 17d-2 under the Act;
(4) clarified the relationship between Archipelago and Wave
Securities, L.L.C. (``Wave''); Archipelago and Terra Nova Trading,
L.L.C. (``Terra Nova''); Terra Nova and TAL Financial Services, LLC
(``TAL''); and Archipelago and White Cap Trading LLC (``White Cap'')
in relation to its requests for exceptions from PCXH's ownership and
voting limitations included in the Notice; (5) provided that the
temporary exception it requested for Wave in the Notice would be
subject to a condition that Archipelago continue to maintain and
comply with its existing information barriers; (6) included a
request for a temporary exception from the PCXH ownership and voting
requirements for the ``inbound routing'' function of its wholly
owned subsidiary Archipelago Trading Services, Inc. (``Arca
Trading'') and the related clearing function performed by
Archipelago Securities, L.L.C. (``Archipelago Securities''), subject
to certain conditions; (7) requested an exception on a 60-day pilot
basis for Archipelago to continue to own and operate an alternative
trading system (``ATS'') for the trading of over-the-counter
bulletin board securities not traded on any exchange; (8) requested
an exception on a pilot basis until the earlier of (a) 60 days and
(b) the closing of the pending merger between Archipelago and the
New York Stock Exchange, Inc. (``NYSE'') for Archipelago to be able
to continue to own and operate, through Archipelago Securities, a
service that provides direct connectivity to the NYSE through DOT
access; and (9) requested accelerated approval of Amendment No. 2.
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II. Description of the Proposal

    On January 3, 2005, PCXH, Archipelago and New Apple Acquisitions
Corporation (``Merger Sub''), a newly formed wholly owned subsidiary of
Archipelago, entered into an Agreement and Plan of Merger,\6\

pursuant to which Archipelago agreed to acquire PCXH and all of PCXH's
wholly owned subsidiaries, including PCX and PCX's equities business
subsidiary, PCX Equities, Inc. (``PCXE''), by way of a merger under
Delaware law of the Merger Sub with and into PCXH, with PCXH as the
surviving corporation (the ``Merger'').\7\ The purpose of the proposed
rule change is to amend the certificate of incorporation of PCXH
(``Certificate of Incorporation of PCXH''), certain rules of the PCX,
and the bylaws of Archipelago (``Archipelago Bylaws'') to facilitate
the consummation of the Merger.
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    \6\ On July 22, 2005, PCXH, Archipelago and Merger Sub amended
and restated the Original Merger Agreement (the agreement, as so
amended, is referred to herein as the ``Merger Agreement'').
    \7\ The closing of the Merger is referred to herein as the
``Effective Time'' of the Merger.
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A. Corporate Structure and Governance

    PCXH, as the surviving corporation in the Merger, will become a
direct, wholly owned subsidiary of Archipelago (the post-Merger PCXH is
referred to herein as the ``New PCXH''). The Certificate of
Incorporation of PCXH as in effect immediately prior to the Effective
Time will be amended pursuant to the Merger Agreement, as described in
this proposed rule change, and as so amended will be the certificate of
incorporation of the New PCXH. The bylaws of PCXH as in effect
immediately prior to the Effective Time will be the bylaws of the New
PCXH. The directors of the Merger Sub at the Effective Time will become
directors of the New PCXH and the officers of PCXH at the Effective
Time will become officers of the New PCXH.
    As represented by PCX in the Notice, except as described in the
Notice or otherwise approved by the Commission, the Merger will not
affect the internal corporate structure of PCXH or the regulatory
relationship of PCX and PCXE to Archipelago Exchange, L.L.C.
(``ArcaEx''), the exclusive equities trading facility of PCX and PCXE.
PCX will remain a wholly owned subsidiary of the New PCXH, will
continue operating the options business of the Exchange, and will
retain the self-regulatory organization responsibility for the options
business and for PCX's equities business subsidiary, PCXE. ArcaEx will
remain the exclusive equities trading facility of PCX and PCXE and the
Amended and Restated Facility Services Agreement among Archipelago, PCX
and PCXE, dated as of March 22, 2002, which currently governs the
regulatory relationship of PCX and PCXE to ArcaEx (the ``FSA''), will
remain in full force and effect in its current form. Except as
otherwise discussed herein, PCXE's operations, governance structure, or
rules will not be affected by the Merger. After the Merger, the board
of directors of PCX and PCXE will continue to meet the compositional
requirements set forth in the certificate of incorporation and bylaws
of PCX and PCXE.

B. Self-Regulatory Function of PCX and Regulatory Jurisdiction Over
Archipelago

    Certain provisions of Archipelago's current certificate of
incorporation (``Certificate of Incorporation of Archipelago'') are
designed to facilitate the ability of PCX, PCXE, and the Commission to
fulfill their regulatory and oversight obligations under the Act.\8\
All but one of these provisions remain applicable only for so long as
ArcaEx remains a facility (as defined in Section 3(a)(2) of the Act)
\9\ of PCX and PCXE and the FSA remains in full force and effect. PCX
represents that following completion of the Merger, ArcaEx will remain
the exclusive equities trading facility of PCX and PCXE, and the FSA
will remain in full force and effect in its current form. In order to
assure, however, the continued force and effect of these provisions in
the event of any change in the relationship of PCX and PCXE to ArcaEx
or the effectiveness of the FSA after completion of the Merger, PCX
proposes to amend the Archipelago Bylaws to provide that Archipelago
will not take any action, and will not permit any of its subsidiaries
(which will include PCXH, PCX, and PCXE, as well as ArcaEx) to take any
action that will cause (i) ArcaEx to cease to be a facility of PCX and
PCXE, or (ii) the FSA to cease to be in full force and effect, unless
each provision in the Certificate of Incorporation of Archipelago that
is subject to the limitation described above is amended to provide that
such provision shall remain in full force and effect whether or not
ArcaEx remains a facility of PCX and PCXE or the FSA is in full force
and effect.\10\
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    \8\ See Sections IV.A and IV.D of Securities Exchange Act
Release No. 50170 (August 9, 2004), 69 FR 50419 (August 16, 2004)
(order approving a proposed rule change in connection with the
initial public offering of Archipelago) (``August 2004 Order'').
These provisions include paragraphs (C)(3)(y), (D)(2), (D)(2)(a) and
(H)(3) of Article Fourth, the third paragraph of Article EIGHTH, the
penultimate paragraph of Article TENTH, and Articles THIRTEENTH,
FOURTEENTH, FIFTEENTH, SIXTEENTH, SEVENTEENTH, EIGHTEENTH and
NINETEENTH of the Certificate of Incorporation of Archipelago. See
also Section 6.8(b) of the Archipelago Bylaws.
    \9\ 15 U.S.C. 78c(a)(2).
    \10\ Archipelago Bylaws, Proposed Section 6.8(c). The foregoing
bylaw provision may not be amended, modified or repealed unless such
amendment, modification or repeal is (i) filed with and approved by
the Commission or (ii) approved by Archipelago stockholders voting
not less than 80% of the then outstanding votes entitled to be cast
in favor of any such amendment, modification or repeal. Archipelago
Bylaws, Proposed Section 6.8(g). In addition, the Archipelago Bylaws
will continue to provide that before any amendment to the bylaws
shall be effective, such amendment shall be submitted to the Board
of Directors of PCX and if such Board shall determine that the same
is required, under Section 19 of the Act and the rules promulgated
thereunder, to be filed with, or filed with and approved by, the
Commission before such amendment may be effective under Section 19
of the Act and the rules promulgated thereunder, then such amendment
shall not be effective until filed with, or filed with and approved
by, the Commission, as the case may be. Archipelago Bylaws, Proposed
Section 6.8(b).
    PCX also proposes to amend Section 6.8(b) of the Archipelago
Bylaws to eliminate the restriction that the provision applies only
for so long as ArcaEx remains a facility of PCX and PCXE and the FSA
is in full force and effect.
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    In addition, certain provisions of the current Certificate of
Incorporation of Archipelago apply only to the extent that their
requirements relate to ArcaEx.\11\ Following completion of the Merger,
PCX and PCXE will become wholly owned subsidiaries of Archipelago. To
also apply these provisions to the operations of PCX and PCXE, PCX
proposes to amend the Archipelago Bylaws to provide that:\12\
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    \11\ Certificate of Incorporation of Archipelago, Article
THIRTEENTH (relating to the submission by Archipelago and its
officers, directors, and certain employees to the jurisdiction of
the United States federal courts, the Commission, and PCX for
matters arising out of or relating to the activities of ArcaEx);
Article FOURTEENTH (providing for the inspection and copying by PCX
and PCXE of Archipelago's books and records as they relate to the
operation and administration of ArcaEx as a facility of PCX and
PCXE); Article SEVENTEENTH (requiring Archipelago to take reasonable
steps necessary to cause its agents to cooperate with PCX and PCXE
with respect to such agents' activities related to ArcaEx); and
Article EIGHTEENTH (requiring that Archipelago cause its officers,
directors, and employees to consent to the applicability to them of
certain provisions of the Certificate of Incorporation of
Archipelago in connection with their activities related to ArcaEx).
    \12\ The following proposed bylaw provisions may not be amended,
modified or repealed unless such amendment, modification or repeal
is (i) filed with and approved by the Commission or (ii) approved by
Archipelago stockholders voting not less than 80% of the then
outstanding votes entitled to be cast in favor of any such
amendment, modification or repeal. Archipelago Bylaws, Proposed
Section 6.8(g).
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     Archipelago's books and records shall be subject at all
times to inspection and copying by PCX and PCXE to the extent such
books and records are related to the operation and administration of
PCX or PCXE; \13\
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    \13\ Archipelago Bylaws, Proposed Section 6.8(e)(i).
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     Archipelago shall take reasonable steps necessary to cause
its agents to cooperate with PCX and PCXE pursuant to their regulatory
authority with

respect to such agents' activities related to PCX or PCXE; \14\
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    \14\ Archipelago Bylaws, Proposed Section 6.8(e)(ii).
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     Archipelago shall take reasonable steps necessary to cause
its officers, directors and employees prior to accepting a position as
an officer, director or employee, as applicable, of Archipelago to
consent in writing to the applicability to them of certain specified
provisions of the Certificate of Incorporation of Archipelago with
respect to their activities related to PCX or PCXE; \15\ and
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    \15\ Archipelago Bylaws, Proposed Section 6.8(e)(iii).
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     Archipelago, its directors and officers, and those of its
employees whose principal place of business and residence is outside
the United States, shall be deemed to irrevocably submit to the
exclusive jurisdiction of the United States Federal courts, the
Commission and PCX for the purposes of any suit, action or proceeding
pursuant to the United States Federal securities laws, and the rules
and regulations thereunder, arising out of, or relating to, the
activities of PCX or PCXE, and Archipelago and each such director,
officer or employee, in the case of any such director, officer or
employee by virtue of his acceptance of any such position, shall be
deemed to waive, and agree not to assert by way of motion, as a defense
or otherwise in any suit, action or proceeding, any claims that it or
they are not personally subject to the jurisdiction of the Commission,
that the suit, action or proceeding is an inconvenient forum or that
the venue of the suit, action or proceeding is improper, or that the
subject matter thereof may not be enforced in or by such courts or
agency.\16\
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    \16\ Archipelago Bylaws, Proposed Section 6.8(e)(iv).
Archipelago undertakes to take reasonable steps necessary to cause
Archipelago's directors and officers and those Archipelago employees
whose principal place of business and residence is outside the
United States prior to accepting a position as an officer, director
or employee, as applicable, of Archipelago to consent in writing to
the applicability to them of this provision. Archipelago also
undertakes that it will take reasonable steps necessary to cause
Archipelago's current directors and officers and those current
Archipelago employees whose principal place of business and
residence is outside the United States to consent in writing prior
to the consummation of the Merger to the applicability to them of
this provision. See Notice, supra note 3.
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    In addition, Archipelago represents in the Notice that, prior to
the earlier of (1) the 2006 annual general meeting of Archipelago
stockholders and (2) the first meeting of Archipelago stockholders to
occur after the closing of the Merger (other than any meeting or
meetings of Archipelago stockholders convened for the purpose of
considering and approving the merger of Archipelago and the NYSE), that
its board of directors will: (a) Propose amendments to the Certificate
of Incorporation of Archipelago to (i) extend the application of voting
and ownership limitations imposed on ETP Holders currently contained in
the Certificate of Incorporation of Archipelago to OTP Holders and OTP
Firms; (ii) delete the phrase ``[f]or so long as ArcaEx remains a
Facility of PCX and PCXE and the FSA remains in full force and effect''
from each paragraph that contains such language; \17\ and (iii)
incorporate amendments to the provisions of the Certificate of
Incorporation of Archipelago that are currently limited to activities
of ArcaEx to cover activities of PCX and PCXE, as noted above; \18\ (b)
declare the advisability of such amendments; and (c) direct such
amendments be submitted for stockholder approval at the earlier of (1)
the 2006 annual meeting of Archipelago stockholders and (2) the first
meeting of Archipelago stockholders to occur after the closing of the
Merger (other than any meeting or meetings of Archipelago stockholders
convened for the purpose of considering and approving the merger of
Archipelago and the NYSE).\19\
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    \17\ Paragraphs (C)(3)(y), (D)(2), (D)(2)(a) and (H)(3) of
Article FOURTH, the third paragraph of Article EIGHTH, the
penultimate paragraph of Article TENTH, Article THIRTEENTH, Article
FOURTEENTH, Article FIFTEENTH, Article SIXTEENTH, Article
SEVENTEENTH and Article NINETEENTH of the Certificate of
Incorporation of Archipelago include this language.
    \18\ Articles THIRTEENTH, FOURTEENTH, SEVENTEENTH AND EIGHTEENTH
of the Certificate of Incorporation of Archipelago would need to be
so amended. See supra notes 13 to 16 and accompanying text.
    \19\ See Notice, supra note 3.
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C. Change of Control of PCX; Voting and Ownership Limitations

    The current Certificate of Incorporation of PCXH provides that (1)
no person (``Person'') \20\ either alone or together with its related
persons (``Related Persons''),\21\ may own shares constituting more
than 40% of the outstanding shares of capital stock of PCXH,\22\ and
(2) no trading permit holder of PCX or equities trading permit holder
of PCXE, either alone or together with its Related Persons, may own
shares constituting more than 20% of the outstanding shares of capital
stock of PCXH.\23\ In addition, the Certificate of Incorporation of
PCXH provides that no Person, either alone of together with its Related
Persons, may vote, possess the right to vote or cause the voting of
shares representing more than 20% of the issued and outstanding capital
stock of PCXH, and also places limitations on the ability of any
person, either alone or together with its Related Persons, to enter
into an agreement with respect to the withholding of any vote or
proxy.\24\
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    \20\ Certificate of Incorporation of PCXH, Article Nine, Section
1(b)(iv), defines ``person'' as an individual, partnership (general
or limited), joint stock company, corporation, limited liability
company, trust or unincorporated organization, or any governmental
entity or agency or political subdivision thereof.
    \21\ Certificate of Incorporation of PCXH, Article Nine, Section
1(b)(iv), defines ``related person'' to be (1) with respect to any
person, all ``affiliates'' and ``associates'' of such person (as
such terms are defined in Rule 12b-2 under the Act); (2) with
respect to any person constituting a trading permit holder of PCX or
an equities trading permit holder of PCXE, any broker dealer with
which such holder is associated; and (3) any two or more persons
that have any agreement, arrangement or understanding (whether or
not in writing) to act together for the purpose of acquiring,
voting, holding or disposing of shares of the capital stock of PCXH.
    \22\ Certificate of Incorporation of PCXH, Article Nine, Section
1(b)(i). Such restriction may be waived by the board of directors of
PCXH pursuant to an amendment to the Bylaws of PCXH adopted by the
board after making certain findings and following certain procedures
as described in more detail in the Notice, supra note 3, and in
Securities Exchange Act Release No. 49718 (May 17, 2004), 69 FR
29611 (May 24, 2004) (the ``May 2004 Order''). Certificate of
Incorporation of PCXH, Article Nine, Sections 1(b)(i)(B) and
1(b)(i)(C).
    \23\ Certificate of Incorporation of PCXH, Article Nine, Section
1(b)(ii). There is no provision allowing the board to waive this
restriction.
    \24\ Certificate of Incorporation of PCXH, Article Nine, Section
1(c). These restrictions were approved in connection with the 2004
demutualization of PCXH. See May 2004 Order, supra note 22, for a
more detailed discussion of the current restrictions in the
Certificate of Incorporation of PCXH.
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1. Exceptions to PCXH Ownership and Voting Restrictions
    As a result of the Merger, Archipelago will own 100% of the capital
stock of PCXH. Thus, absent an exception, Archipelago and its Related
Persons, some of which are ETP Holders, would exceed these ownership
and voting limitations in violation of the current Certificate of
Incorporation of PCXH. The proposed rule change therefore would amend
the Certificate of Incorporation of PCXH to create an exception to the
voting and ownership limitations for Archipelago and certain Related
Persons of Archipelago to permit Archipelago to own 100% of the capital
stock of PCXH.\25\
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    \25\ Certificate of Incorporation of PCXH, Proposed Article
Nine, Section 4.
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    In particular, the proposed rule change would add a new paragraph
at the end of Article Nine of the Certificate of Incorporation of PCXH
that would provide that, for so long as Archipelago directly owns all
of the outstanding capital stock of PCXH, the provisions of Article
Nine, including the ownership

and voting limitations with respect to shares of PCXH capital stock,
would not be applicable to the voting and ownership of shares of PCXH
capital stock by (1) Archipelago, (2) any person that is a Related
Person of Archipelago, either alone or together with its related
persons, and (3) any other person to which Archipelago is a Related
Person, either alone or together with its Related Persons. These
exceptions to the ownership and voting limitations, however, would not
apply to ``prohibited persons.'' \26\
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    \26\ Id.
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    ``Prohibited persons'' would be defined to mean any person that is,
or that has a related person that is (1) an OTP Holder or an OTP Firm
(as such terms are defined in the rules of PCX, as such rules may be in
effect from time to time) \27\ or (2) an ETP Holder (as such term is
defined in the rules of PCX, as such rules may be in effect from time
to time),\28\ except: (A) any broker or dealer approved by the
Commission after June 20, 2005 to be a facility (as defined in Section
3(a)(2) of the Act) \29\ of PCX; (B) any person that has been approved
by the Commission prior to it becoming subject to the provisions of
Article Nine of the Certificate of Incorporation of PCXH with respect
to the voting and ownership of shares of PCXH capital stock by such
person; and (C) any person that is a related person of Archipelago
solely by reason of beneficially owning, either alone or together with
its Related Persons, less than 20% of the outstanding shares of
Archipelago capital stock (any person covered by (A) through (C) is
referred to as a ``permitted person'' in proposed Section 4 of Article
Nine of the Certificate of Incorporation of PCXH).\30\ The proposed
Section 4 of Article Nine of the Certificate of Incorporation of PCXH
would further provide that any other prohibited person not covered by
the definition of a permitted person who would be subject to and exceed
the voting and ownership limitations imposed by Article Nine as of the
date of the closing of the Merger would be permitted to exceed the
voting and ownership limitations imposed by Article Nine only to the
extent and for the time period approved by the Commission.\31\
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    \27\ PCX Rule 1.1(q) defines an ``OTP Holder'' to mean any
natural person, in good standing, who has been issued an Options
Trading Permit (``OTP'') by the Exchange for effecting approved
securities transactions on the Exchange's trading facilities, or has
been named as a Nominee. PCX Rule 1.1(n) defines a ``Nominee'' to
mean an individual who is authorized by an ``OTP Firm'' (a sole
proprietorship, partnership, corporation, limited liability company
or other organization in good standing who holds an OTP or upon whom
an individual OTP Holder has conferred trading privileges on the
Exchange's trading facilities) to conduct business on the Exchange's
trading facilities and to represent such OTP Firm in all matters
relating to the Exchange.
    \28\ PCXE Rule 1.1(n) defines an ``ETP Holder'' to mean any sole
proprietorship, partnership, corporation, limited liability company
or other organization in good standing that has been issued an
Equity Trading Permit, a permit issued by the PCXE for effecting
approved securities transactions on the trading facilities of PCXE.
    \29\ Section 3(a)(2) defines the term ``facility,'' when used
with respect to an exchange, to include its premises, tangible or
intangible property whether on the premises or not, any right to the
use of such premises or property or any service thereof for the
purpose of effecting or reporting a transaction on an exchange
(including, among other things, any system of communication to or
from the exchange, by ticker or otherwise, maintained by or with the
consent of the exchange), and any right of the exchange to the use
of any property or service. 15 U.S.C. 78c(a)(2)
    \30\ Certificate of Incorporation of PCXH, Proposed Article
Nine, Section 4.
    \31\ Id.
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a. Outbound Router
    Archipelago Securities is a registered broker-dealer, a member of
the National Association of Securities Dealers, Inc. (``NASD''), and an
ETP Holder. Archipelago Securities currently provides an optional
routing service for ArcaEx to route orders to other securities
exchanges, facilities of securities exchanges, automated trading
systems, electronic communications networks or other brokers or dealers
(collectively, ``Market Centers'') from ArcaEx in compliance with PCXE
rules (such function of Archipelago Securities is referred to as the
``Outbound Router''). In its capacity as an Outbound Router,
Archipelago Securities operates and is regulated as a facility of
PCX.\32\ As such, the Outbound Router function of Archipelago
Securities is subject to PCX's and the Commission's continuing
oversight. In particular, PCX is responsible for filing with the
Commission rule changes and fees relating to the Outbound Router
function, and for ensuring that the Outbound Router complies with the
requirement not to unfairly discriminate.\33\ Archipelago intends to
continue to own and operate Archipelago Securities following the
closing of the Merger. The proposed operation of Archipelago Securities
as an Outbound Router after the closing of the Merger will not change
from the way it is administered and operated today.\34\
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    \32\ Archipelago Securities was approved by the Commission to
operate as a facility of PCXE on October 25, 2001 in connection with
the Commission's approval of the rules of PCX establishing ArcaEx as
a facility of PCXE. See Securities Exchange Act Release No. 44983
(October 25, 2001), 66 FR 55225 (November 1, 2001) (the ``Original
Outbound Router Release''). The name of the order routing broker-
dealer was originally Wave Securities, L.L.C. as approved by the
Commission in the Original Outbound Router Release.
    \33\ See, e.g., Section 6(b)(5) of the Act, 15 U.S.C. 78f(b)(5).
    \34\ As an Outbound Router, Archipelago Securities will continue
to receive instructions from ArcaEx, route orders to other Market
Centers in accordance with those instructions and be responsible for
reporting resulting executions back to ArcaEx. In addition, all
orders routed through Archipelago Securities would remain subject to
the terms and conditions of PCXE rules. See Notice, supra note 3,
and Original Outbound Router Release, supra note 32, at 55233-55235
(describing the operation of the order routing broker-dealer
approved by the Commission).
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    After the closing of the Merger, Archipelago's continued ownership
of Archipelago Securities would cause Archipelago Securities to exceed
the ownership and voting limitations contained in Article Nine of the
Certificate of Incorporation of PCXH (because Archipelago Securities is
an ETP Holder and a Related Person of Archipelago), absent an
exception. Pursuant to the proposed exception in proposed Article Nine,
Section 4 of the Certificate of Incorporation of PCXH for a Related
Person of Archipelago that is a broker or dealer approved by the
Commission after June 20, 2005 to be a facility of PCX, PCX has
proposed that the Commission approve Archipelago Securities, a wholly
owned subsidiary of Archipelago, to be a facility (as defined in
Section 3(a)(2) of the Act) of PCX, subject to the following:
     PCX will continue to regulate the Outbound Router function
of Archipelago Securities as a facility of the Exchange, subject to
Section 6 of the Act.
     The NASD, a self-regulatory organization (``SRO'')
unaffiliated with Archipelago or any of its affiliates, will continue
to carry out oversight and enforcement responsibilities as the
Designated Examining Authority (``DEA'') designated by the Commission
pursuant to Rule 17d-1 of the Act with the responsibility for examining
Archipelago Securities for compliance with the applicable financial
responsibility rules.
     The agreement between the NASD and PCX currently in place
pursuant to Rule 17d-2 under the Act \35\ (the ``NASD PCX Agreement'')
will remain in full force and effect and PCX will continue to abide by
the terms of such agreement. The NASD PCX Agreement allocates to

the NASD the responsibility to receive regulatory reports from
Archipelago Securities, to examine Archipelago Securities for
compliance and to enforce compliance by Archipelago Securities with the
Act, the rules and regulations thereunder and the rules of the NASD,
and to carry out other specified regulatory functions with respect to
Archipelago Securities.
---------------------------------------------------------------------------

    \35\ Rule 17d-2 provides that any two or more SROs may file with
the Commission a plan for allocating among such SROs the
responsibility to receive regulatory reports from persons who are
members or participants of more than one of such SROs to examine
such persons for compliance, or to enforce compliance by such
persons, with specified provisions of the Act, the rules and
regulations thereunder, and the rules of such SROs, or to carry out
other specified regulatory functions with respect to such persons.
17 CFR 240.17d-2.
---------------------------------------------------------------------------

     PCX will amend the NASD PCX Agreement within 90 days of
the Commission's approval of this proposed rule change \36\ to expand
the scope of the NASD's regulatory functions so as to encompass all of
the regulatory oversight and enforcement responsibilities with respect
to Archipelago Securities pursuant to applicable laws, except for real-
time market surveillance.\37\
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    \36\ See Amendment No. 2.
    \37\ In Amendment No. 2, PCX clarified that ``real-time market
surveillance'' means marketplace regulation and marketplace
surveillance, including surveillance and enforcement related to PCXE
trading rules, PCX and PCXE rules relating to trading on ArcaEx, and
Commission rules relating to trading.
---------------------------------------------------------------------------

     An ETP Holder's use of Archipelago Securities to route
orders to another Market Center from ArcaEx will continue to be
optional. Any ETP Holder that does not want to use Archipelago
Securities may use other routers to route orders to other Market
Centers.\38\
---------------------------------------------------------------------------

    \38\ An ETP Holder may chose to route an order to ArcaEx that,
if not executable on ArcaEx, will be cancelled and returned to the
ETP Holder, at which time the ETP Holder could chose to route the
order to another market.
    Those ETP Holders who choose to use the Outbound Router function
provided by Archipelago Securities must sign an Archipelago
Securities Routing Agreement. Importantly, among other things, the
Archipelago Securities Routing Agreement provides that all orders
routed through Archipelago Securities are subject to the terms and
conditions of PCXE rules. See Archipelago Securities Routing
Agreement, http://www.tradearca.com/exchange/pdfs/ETPApplication.pdf

(as of September 20, 2005).
---------------------------------------------------------------------------

     Archipelago Securities will not engage in any business
other than its Outbound Router function (including, in that function,
the self-clearing functions that it currently performs for trades with
respect to orders routed to other Market Centers) and other activities
approved by the Commission.
b. Inbound Router
    As noted above in this Section II.C.1., the proposed rule change
includes an exception to the ownership and voting restrictions in the
Certificate of Incorporation of PCXH to allow any Related Person of
Archipelago that is a prohibited person not covered by the definition
of a permitted person to exceed these voting and ownership limitations
only to the extent and for the time period approved by the
Commission.\39\ Archipelago wholly owns and operates two other ETP
Holders, Wave and Arca Trading.\40\ Wave acts as an introducing broker
for institutional customers to provide access to ArcaEx and other
market centers.\41\ Arca Trading acts as an introducing broker for non-
ETP Holder broker-dealer customers for securities traded on ArcaEx
(individually and collectively, the ``Inbound Router functions'').\42\
In addition, Archipelago Securities provides clearing functions for
trades executed by the Inbound Router function of Arca Trading.
---------------------------------------------------------------------------

    \39\ Certificate of Incorporation of PCXH, Proposed Article
Nine, Section 4.
    \40\ Each of Wave and Arca Trading is a wholly owned subsidiary
of Archipelago, an ETP Holder, and a member of the NASD. See
Amendment No. 2.
    \41\ See Amendment No. 2.
    \42\ Id.
---------------------------------------------------------------------------

    As a wholly owned subsidiary of Archipelago, each of Wave and Arca
Trading is a Related Person of Archipelago, and thus Archipelago's
ownership of PCXH, absent an exception, would cause Wave and Arca
Trading, as ETP Holders, to exceed the voting and ownership limitations
imposed by Article Nine of the Certificate of Incorporation of PCXH.
PCX requests the Commission's approval of a temporary exception for (1)
Arca Trading and Archipelago Securities, with respect to the Inbound
Router function of Arca Trading and the related clearing function of
Archipelago Securities, and (2) for Wave to permit them to exceed the
voting and ownership limitations imposed by Article Nine of the
Certificate of Incorporation of PCXH (as proposed to be amended as
described in this filing) to the following extent and for the following
time periods:
     Archipelago may, until December 31, 2005, continue to own
Wave provided Archipelago continues to maintain and comply with its
current information barriers between Wave on the one hand and PCX,
PCXE, and other subsidiaries of Archipelago that are facilities of PCX
or PCXE on the other hand.\43\
---------------------------------------------------------------------------

    \43\ PCX clarified in Amendment No. 2 that the request for a
temporary exception for Wave is subject to this condition.
---------------------------------------------------------------------------

     Archipelago may, until the earlier of March 31, 2006 and
the closing date of the proposed merger of Archipelago and the NYSE,
continue to own and operate the Inbound Router function of Arca Trading
and the related clearing function of Archipelago Securities following
the closing of its acquisition of PCXH provided that: (1) The revenues
derived by Archipelago from the Inbound Router function of Arca Trading
do not exceed 7% of the consolidated revenues of Archipelago
(determined on a quarterly basis); (2) the Inbound Router function of
Arca Trading does not accept any new clients following the closing of
the Merger; and (3) Archipelago continues to maintain and comply with
its current information barriers between the Inbound Router function of
Arca Trading on the one hand and PCX, PCXE, and other subsidiaries of
Archipelago that are facilities of PCX or PCXE on the other hand.\44\
---------------------------------------------------------------------------

    \44\ See Amendment No. 2. The Commission also notes that each of
Wave, Arca Trading and Arca Securities are covered by the NASD PCX
Agreement, see Amendment No.2 and supra Section II.C.1.a, and that
the NASD is the DEA for each.
---------------------------------------------------------------------------

c. Other ETP Holders That Are ``Related Persons'' of Archipelago
    PCX requests the Commission's approval of a temporary exception for
Terra Nova so that Terra Nova may be permitted to exceed the voting and
ownership limitations imposed by Article Nine of the Certificate of
Incorporation of PCXH (as proposed to be amended as described in this
filing) to the following extent and for the following time periods:
     Gerald D. Putnam, Chairman and Chief Executive Officer
(``CEO'') of Archipelago, may, until December 31, 2005, continue to
beneficially own in excess of 5% of Terra Nova and continue to serve as
a director of TAL following the closing of the Merger notwithstanding
the terms of the Certificate of Incorporation of PCXH, as proposed to
be amended as described in this filing.\45\
---------------------------------------------------------------------------

    \45\ Terra Nova is an ETP Holder and a wholly owned subsidiary
of TAL. Archipelago's ownership of PCXH would cause Terra Nova, as
an ETP Holder, to exceed the ownership and voting limitations
imposed by Article Nine of the Certificate of Incorporation of PCXH
(as proposed to be amended) as of the date of the closing of the
Merger, by virtue of Mr. Putnam's beneficial ownership in excess of
5% of Terra Nova and his service as a director of TAL. See Amendment
No. 2. PCX clarified that Mr. Putnam's ownership of Terra Nova is
beneficial, not direct. Terra Nova is a wholly owned subsidiary of
TAL and Mr. Putnam owns 40% of TAL. Telephone conversation between
Kathryn Beck, General Counsel, PCX and Jennifer Dodd, Special
Counsel, Division of Market Regulation (``Division''), Commission,
on September 20, 2005.
---------------------------------------------------------------------------

    Also, to abide by the terms of the Certificate of Incorporation of
PCXH, as proposed to be amended as described in this filing, Kevin J.P.
O'Hara, Chief Administrative Officer and General Counsel of
Archipelago, and Paul Adcock, Managing Director, Trading, of

Archipelago, shall resign from the board of directors of White Cap
prior to the Effective Time.\46\
---------------------------------------------------------------------------

    \46\ White Cap is an ETP Holder and a Related Person of
Archipelago by virtue of Messrs. O'Hara and Adcock's services as
directors of White Cap. See Amendment No. 2.
---------------------------------------------------------------------------

    In addition to its Inbound Router services, Arca Trading operates
an alternative trading system (``ATS''), as defined in Rule 300 of
Regulation ATS under the Act,\47\ for trading in over-the-counter
bulletin board securities that are not traded on any securities
exchange (the ``ATS OTC function'').\48\ Archipelago Securities also
engages in the business of providing broker-dealer clients with direct
connectivity to the NYSE, through the NYSE's Designated Order
Turnaround system (the ``DOT function'').\49\ PCX requests the
Commission's approval of an exception for Arca Trading and Archipelago
Securities from the voting and ownership limitations of Article Nine of
the Certificate of Incorporation of PCXH (as proposed to be amended as
described in this filing) to the following extent and for the following
time periods:
---------------------------------------------------------------------------

    \47\ 17 CFR 242.300.
    \48\ See Amendment No. 2. Archipelago Securities provides
clearing functions for trades executed on this ATS, and PCX
requested an exception for this clearing function in the Notice.
    \49\ This service is separate from Archipelago Securities'
Outbound Router function and is not included within the request for
an exception for the Outbound Router function described in Section
II.C.1.a. above. See Amendment No. 2.
---------------------------------------------------------------------------

     Archipelago may continue to own the ATS OTC function of
Arca Trading for a period of 60 days following the closing of the
Merger; \50\ and
---------------------------------------------------------------------------

    \50\ See Amendment No. 2.
---------------------------------------------------------------------------

     Archipelago may own the DOT function of Archipelago
Securities until the earlier of (1) a period of 60 days following the
closing of the Merger, and (2) the closing date of the proposed merger
of Archipelago and the NYSE.\51\
---------------------------------------------------------------------------

    \51\ Id.
---------------------------------------------------------------------------

2. Ownership and Voting Restrictions on Archipelago Stockholders
    The Certificate of Incorporation of Archipelago contains similar
ownership and voting restrictions with respect to Archipelago stock as
those imposed on PCXH stockholders under the Certificate of
Incorporation of PCXH. These provisions are intended to ensure that the
ownership of Archipelago by the public will not unduly interfere with
or restrict the ability of the Commission or PCX to effectively carry
out their regulatory oversight responsibilities under the Act, with
respect to ArcaEx, and generally to enable ArcaEx to operate in a
manner that complies with the Federal securities laws, including
furthering the objectives of Section 6(b)(5) of the Act.\52\
---------------------------------------------------------------------------

    \52\ These restrictions were approved by the Commission in
connection with Archipelago's initial public offering in 2004. See
August 2004 Order, supra note 8.
---------------------------------------------------------------------------

    Specifically, (1) no person,\53\ either alone or together with its
related persons,\54\ shall be permitted at any time to own beneficially
shares of Archipelago stock representing in the aggregate more than 40%
of the then outstanding votes entitled to be cast on any matter,\55\
and (2) for long as ArcaEx is a facility of PCX and PCXE and the FSA is
in effect,\56\ no ETP Holder, either alone or with its related persons,
shall be permitted at any time to own beneficially shares of
Archipelago stock representing in the aggregate more than 20% of the
then outstanding votes entitled to be cast on any matter.\57\ In
addition, no person, either alone or with its related persons, may (1)
vote or cause the voting of shares of stock of Archipelago to the
extent such shares represent in the aggregate more than 20% of the then
outstanding votes entitled to be cast on any matter (``Archipelago
Certificate Voting Limitation''), or (2) enter into any agreement, plan
or arrangement not to vote shares, the effect of which agreement, plan
or arrangement would be to enable any person, either alone or with its
related persons, to vote or cause the voting of shares that would
represent in the aggregate more that 20% of the then outstanding votes
entitled to be cast on any matter (``Archipelago Certificate Non-Voting
Agreement Prohibition'').\58\
---------------------------------------------------------------------------

    \53\ Person means a natural person, company, government, or
political subdivision, agency, or instrumentality of a government.
Certificate of Incorporation of Archipelago, Article FOURTH, Section
H(2).
    \54\ Related Persons is defined in Article FOURTH, Section H(3)
of the Certificate of Incorporation of Archipelago.
    \55\ Such restriction may be waived by the board of directors of
Archipelago after making certain findings and following certain
procedures as described in more detail in Article FOURTH, Section
D(1) of the Certificate of Incorporation of Archipelago.
    \56\ PCX proposes to amend the Archipelago Bylaws to provide
that Archipelago will not take any action, and will not permit any
of its subsidiaries to take any action that will cause (i) ArcaEx to
cease to be a facility of PCX and PCXE, or (ii) the FSA to cease to
be in full force and effect, unless each provision in the
Certificate of Incorporation of Archipelago that is subject to this
limitation, including this provision, is amended to provide that
such provision shall remain in full force and effect whether or not
ArcaEx remains a facility of PCX and PCXE or the FSA is in full
force and effect. Archipelago also undertakes that its board of
directors will propose, and declare the advisability of, and submit
to shareholders certain amendments to its certificate to extend the
ownership and voting limitations to all PCX members and to delete
this limiting language. See supra notes 17 to 19 and accompanying
text.
    \57\ Certificate of Incorporation of Archipelago, Section D(2)
of Article FOURTH. The Certificate of Incorporation of Archipelago
does not have any provisions that would permit the Board of
Archipelago to waive the 20% limitation relating to any ETP Holders.
In addition, if an ETP Holder, either alone or together with its
related persons, owns beneficially shares of stock of Archipelago in
excess of this 20% limitation, Archipelago would be required to call
from such ETP Holder and its related persons that number of shares
of stock entitled to vote that exceed the 20% limitation at a price
equal to par value of the shares of stock. Certificate of
Incorporation of Archipelago, Section D(2).
    \58\ Certificate of Incorporation of Archipelago, Sections C of
Article FOURTH.
---------------------------------------------------------------------------

    Because Archipelago would own PCXH, and thus PCX, after the Merger,
the proposed PCX rules would extend the ownership restriction in
Archipelago's Certificate of Incorporation to PCX members other than
ETP Holders. The proposed PCX rules would provide that for as long as
Archipelago controls, directly or indirectly, PCX, no OTP Holder or OTP
Firm, either alone or with its related persons,\59\ shall own
beneficially shares of Archipelago stock representing in the aggregate
more than 20% of the then outstanding votes entitled to be cast on any
matter (the ``Ownership Limitation'').\60\
---------------------------------------------------------------------------

    \59\ ``Related persons'' would be defined in proposed PCX Rule
1.1(gg).
    \60\ Proposed PCX Rule 3.4(a).
---------------------------------------------------------------------------

    In addition to this Ownership Limitation, the proposed PCX rules
provide that for as long as Archipelago shall control, directly or
indirectly, PCX, no OTP Holder or OTP Firm, either alone or together
with its related persons, shall (1) have the right to vote, vote or
cause the voting of shares of stock of Archipelago to the extent such
shares represent in the aggregate more than 20% of the then outstanding
votes entitled to be cast on any matter (the ``Voting Limitation'') or
(2) enter into any agreement, plan or arrangement not to vote shares,
the effect of which agreement, plan or arrangement would be to enable
any person, either alone or with its related persons, to vote or cause
the voting of shares that would represent in the aggregate more than
20% of the then outstanding votes entitled to be cast on any matter
(the ``Nonvoting Agreement Prohibition'').\61\
---------------------------------------------------------------------------

    \61\ Proposed PCX Rule 3.4(b). The Voting Limitation and
Nonvoting Agreement Prohibition would not apply to (1) any
solicitation of any revocable proxy from any stockholder of
Archipelago by or on behalf of Archipelago or by an officer or
director of Archipelago acting on behalf of Archipelago or (2) any
solicitation of any revocable proxy from any stockholder of
Archipelago by any other stockholder that is conducted pursuant to,
and in accordance with, Regulation 14A promulgated pursuant to the
Act. Id.

---------------------------------------------------------------------------

    The proposed rules also would require OTP Holders, OTP Firms, and
their ``associated persons'' (as such term is defined in Section
3(a)(18) of the Act,\62\ and referred to as ``OTP Associates''), to
enter into an agreement with PCX and Archipelago \63\ pursuant to which
such OTP Holder, OTP Firm or OTP Associate would agree to comply with
the ownership and voting limitations imposed by the proposed PCX
rules,\64\ to authorize Archipelago to vote their shares of Archipelago
stock in favor of amendments to the Certificate of Incorporation of
Archipelago that incorporate such ownership and voting limitations,\65\
and to be subject to disciplinary action pursuant to the proposed PCX
rules if they violate any of the ownership and voting limitations or
fail to enter into such ownership and voting agreement (such agreement,
the ``Ownership and Voting Agreement'').\66\ Under the proposed rules,
failure to comply with the ownership and voting limitations or failure
to enter into the Ownership and Voting Agreement in a timely manner
would subject the responsible OTP Holder or OTP Firm to the suspension
of all trading rights and privileges, unless such violation is
cured.\67\
---------------------------------------------------------------------------

    \62\ 15 U.S.C. 78c(a)(18).
    \63\ Proposed PCX Rule 3.4(c) would require (1) a person who is
an OTP Holder, OTP Firm or OTP Associate which is not an ETP Holder
and which (x) owns beneficially any shares of Archipelago stock or
(y) has entered into any agreement, plan or other arrangement
relating to the voting or ownership of any shares of Archipelago
stock, at the time of the closing of the Merger, to enter into the
Ownership and Voting Agreement (as defined below) no later than 30
calendar days following the date of closing of the Merger; and (2) a
person who is any OTP Holder, OTP Firm or OTP Associate which is not
required to enter into an Ownership and Voting Agreement pursuant to
the above clause to enter into the Ownership and Voting Agreement no
later than the fifth calendar day following the date on which: (x)
such OTP Holder, OTP Firm or OTP Associate ceases being an ETP
Holder and (A) owns or acquires beneficial ownership of any shares
of Archipelago stock or (B) is a party to or enters into any
agreement, plan or other arrangement relating to the voting or
ownership of any shares of Archipelago stock; or (y) such OTP
Holder, OTP Firm or OTP Associate which is not an ETP Holder (A)
acquires beneficial ownership of any shares of Archipelago stock or
(B) enters into any agreement, plan or other arrangement relating to
the voting or ownership of any shares of Archipelago stock.
    \64\ Proposed PCX Rules 3.4(c)(1) and (c)(2).
    \65\ Proposed PCX Rule 3.4(c)(3).
    \66\ Proposed PCX Rule 3.4(d)(3).
    \67\ Proposed PCX Rule 13.2(a)(2)(E). Proposed PCX Rule
13.2(a)(2)(E) would provide that in the event of any such failure to
comply with proposed PCX Rule 3.4, PCX shall: (1) provide notice to
the applicable OTP Holder or OTP Firm within five business days of
learning of the failure to comply; (2) allow the applicable OTP
Holder, OTP Firm or OTP Associate of such OTP Holder or OTP Firm
fifteen calendar days to cure any such failure to comply; (3) in the
event that the applicable OTP Holder, OTP Firm or OTP Associate of
such OTP Holder or OTP Firm does not cure such failure to comply
within such fifteen calendar day cure period, schedule a hearing to
occur within thirty calendar days following the expiration of such
fifteen calendar day cure period; and (4) render its decision as to
the suspension of all trading rights and privileges of the
applicable OTP Holder or OTP Firm no later than ten calendar days
following the date of such hearing.
---------------------------------------------------------------------------

    In addition, the proposed rules would require that the Ownership
and Voting Agreement contain provisions designed to provide a
disincentive for OTP Holders and OTP Firms to exceed the ownership and
voting limitations imposed by the PCX rules. Specifically, proposed PCX
Rule 3.4(d) would provide that in the event that any OTP Holder or OTP
Firm, either alone or with its related persons (including any related
persons who are OTP Associates of such OTP Holder or OTP Firm), at any
time owns beneficially shares of Archipelago stock in excess of the
Ownership Limitation, Archipelago would be required to promptly call
from such OTP Holder or OTP Firm, or an OTP Associate of such OTP
Holder or OTP Firm, at a price per share equal to the par value
thereof, shares of Archipelago stock owned by such OTP Holder, OTP Firm
or OTP Associate that are necessary to decrease the beneficial
ownership of such OTP Holder or OTP Firm, either alone or with its
related persons, to 20% of the then outstanding votes entitled to be
cast on any matter after giving effect to the redemption of the shares
of Archipelago stock.\68\
---------------------------------------------------------------------------

    \68\ Proposed PCX Rule 3.4(d)(1). For additional details on the
procedures for making such calls and on the formula for determining
the number of shares to be called, see Notice, supra note 3.
---------------------------------------------------------------------------

    The proposed PCX rules and the Ownership and Voting Agreement also
would provide that, if any OTP Holder or OTP Firm, either alone or with
its related persons (including any related persons who are OTP
Associates of such OTP Holder or OTP Firm), acquires the right to vote
more than 20% of the then outstanding votes entitled to be cast by
stockholders of Archipelago on any matter, Archipelago shall have the
right to vote and shall vote such shares of Archipelago stock.\69\ In
addition, the proposed PCX rules and the Ownership and Voting Agreement
would provide that in the event any OTP Holder or OTP Firm, either
alone or with its related persons (including any related person that is
an OTP Associate of such OTP Holder or OTP Firm), has cast votes, in
person or by proxy or through any voting agreement or other
arrangement, in excess of the Voting Limitation, Archipelago may bring
suit in a court of competent jurisdiction against such OTP Holder, OTP
Firm or OTP Associates seeking enforcement of the Voting
Limitation.\70\
---------------------------------------------------------------------------

    \69\ Proposed PCX Rule 3.4(d)(2).
    \70\ Proposed PCX Rule 3.4(d)(4). The Commission notes that OTP
Holders and OTP Firms are currently subject to the existing voting
limitations contained in the Certificate of Incorporation of
Archipelago that apply to any person. Certificate of Incorporation
of Archipelago, Article FOURTH, Section C.
---------------------------------------------------------------------------

    Furthermore, the proposed PCX rules provide that in the event of
any violation by any OTP Holder or OTP Firm of the Ownership
Limitation, Voting Limitation or Nonvoting Agreement Prohibition
(including, without limitation, any failure of an OTP Holder, OTP Firm
or OTP Associate to enter into the Ownership and Voting Agreement
within the applicable time periods), the Exchange shall suspend all
trading rights and privileges of such OTP Holder or OTP Firm in
accordance with proposed PCX Rule 13.2(a)(2)(E), subject to the
procedures provided therein.\71\
---------------------------------------------------------------------------

    \71\ Proposed PCX Rule 3.4(d)(3).
---------------------------------------------------------------------------

    In addition, PCX proposes an amendment to the Archipelago Bylaws
that would prohibit the board of directors of Archipelago from waiving
the 40% ownership limitation, the Archipelago Certificate Voting
Limitation or the Archipelago Certificate Non-Voting Agreement
Prohibition for any OTP Holder, OTP Firm, or any of their related
persons.\72\ The proposed amendments to the Archipelago Bylaws also
would clarify that, should Archipelago call shares from certain of its
stockholders in the event of breaches of certain ownership limitations
pursuant to Archipelago's Certificate of Incorporation, the board of
directors of Archipelago would cause Archipelago to call promptly
shares of stock of Archipelago and also to give notice of such call
promptly.\73\
---------------------------------------------------------------------------

    \72\ Archipelago Bylaws, Proposed Section 6.8(d). See Article
FOURTH, Section H(3) of the Certificate of Incorporation of
Archipelago for the definition of ``related person.'' For additional
details regarding this definition, see August 2004 Order, supra note
8.
    \73\ Archipelago Bylaws, Proposed Section 6.8(f).
---------------------------------------------------------------------------

III. Solicitation of Comments

    Interested persons are invited to submit written data, views, and
arguments concerning Amendment No. 2, including whether Amendment No.
2, 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

Number SR-PCX-2005-90 on the subject line.

Paper Comments:

     Send paper comments in triplicate to Jonathan G. Katz,
Secretary, Securities and Exchange Commission, Station Place, 100 F
Street, NE., Washington, DC 20549-9303.
    All submissions should refer to File Number SR-PCX-2005-90. 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 Commission's 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 PCX. 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 Amendment No.
2 of File Number SR-PCX-2005-90 and should be submitted on or before
October 20, 2005.

IV. Discussion of Commission Findings

    After careful review, 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.\74\ In particular, the Commission finds that the
proposal is consistent with Section 6(b)(1) of the Act,\75\ which
requires a national securities exchange to be so organized and have the
capacity to be able to carry out the purposes of the Act and to enforce
compliance by its members and persons associated with its members with
the provisions of the Act, the rules or regulations thereunder, and the
rules of the exchange. The Commission also finds that the proposal is
consistent with Section 6(b)(5) of the Act,\76\ which requires, among
other things, that the rules of an exchange be designed to promote just
and equitable principles of trade; to facilitate transactions in
securities; to remove impediments to and perfect the mechanisms of a
free and open market and a national market system; and, in general, to
protect investors and the public interest.\77\
---------------------------------------------------------------------------

    \74\ In approving the proposed rule change, the Commission has
considered its impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
    \75\ 15 U.S.C. 78f(b)(1).
    \76\ 15 U.S.C. 78f(b)(5).
    \77\ The Commission notes that it is in the process of reviewing
issues relating to new ownership structures of SROs, and has
proposed rules relating to the ownership of SROs, including imposing
restrictions on member ownership of an SRO or a facility of an SRO.
See Securities Exchange Act Release No. 50699 (November 18, 2004),
69 FR 71126 (December 8, 2004).
---------------------------------------------------------------------------

    The Commission discusses below significant aspects of the proposed
rule change.

A. Self-Regulatory Function of the Exchange; Relationship Between PCX
and Archipelago; Jurisdiction Over Archipelago

    As represented by PCX, the Merger will not affect the internal
corporate structure of PCXH or the regulatory relationship among PCX,
PCXE, and ArcaEx, except as described in Section II.A above or
otherwise approved by the Commission. PCX will continue operating the
options business of the Exchange, and ArcaEx will remain the exclusive
equities trading facility of PCX and PCXE (and the FSA will remain in
full force and effect in its current form). PCX will continue to
operate as a registered national securities exchange under Section 6 of
the Act, and will retain the self-regulatory organization function.
Except as otherwise discussed herein, PCXE's operations, governance
structure, or rules will not be affected by the Merger. All persons
using PCX or ArcaEx will continue to be subject to the Exchange's rules
and PCX will maintain its current regulatory authority over its
members. Although Archipelago and PCXH do not themselves carry out
regulatory functions, their activities with respect to the operation of
ArcaEx and options trading on PCX should be consistent, and not
interfere, with PCX's self-regulatory obligations.
    Certain provisions in the Certificate of Incorporation and Bylaws
of PCXH (as the owner of the Exchange) and Archipelago (as the owner
and operator of the equities trading facility of the Exchange) are
designed to maintain the independence of PCX's self-regulatory function
and facilitate the ability of PCX, PCXE, and the Commission to fulfill
their regulatory and oversight obligations under the Act.\78\ For
example, PCXH and Archipelago consented to the Commission's
jurisdiction with respect to activities relating to PCX, or ArcaEx,
respectively, agreed to provide the Commission and PCX access to their
books and records to the extent they relate to PCX or ArcaEx,
respectively, and agreed to cooperate with the Commission and PCX
pursuant to their regulatory authority.\79\ PCXH and Archipelago also
agreed to keep confidential non-public information relating to PCX and
not to use such information for any commercial purposes.\80\ In
addition, the boards of directors of PCXH and Archipelago are required
to explicitly consider in the performance of their duties PCX's
regulatory obligations under the Act.\81\
---------------------------------------------------------------------------

    \78\ See Sections V.C and V.D of the May 2004 Order, supra note
22, and Sections IV.A and IV.D of the August 2004 Order, supra note
8.
    \79\ Bylaws of PCXH, Article 7, Sections 7.03, 7.04 and 7.05 and
Certificate of Incorporation of Archipelago, Articles THIRTEENTH,
FOURTEENTH and SIXTEENTH.
    \80\ Bylaws of PCXH, Article 3, Section 3.15 and Certificate of
Incorporation of Archipelago, Article FOURTEENTH.
    \81\ Bylaws of PCXH, Article 3, Section 3.15 and Certificate of
Incorporation of Archipelago, Article TENTH.
---------------------------------------------------------------------------

    Because Archipelago will become the sole stockholder and the parent
of PCXH as a result of the Merger, and thus the owner of the Exchange
in addition to the equities trading facility of the Exchange, the
Commission continues to believe that such provisions are appropriate.
Certain of these provisions in the Certificate of Incorporation of
Archipelago and the Archipelago Bylaws, however, currently apply only
with respect to activities related to ArcaEx, or only so long as ArcaEx
remains the exclusive equities trading facility of PCX and the FSA
remains in full force and effect.\82\ To assure the continued force and
effect of these provisions after Archipelago acquires the Exchange,
even if there is a change in the relationship of PCX and PCXE to ArcaEx
or the effectiveness of the FSA after completion of the Merger, PCX
proposes to amend the Archipelago Bylaws to expand the application of
these provisions to activities related to PCX and PCXE.\83\ In
addition, PCX proposes to amend the Archipelago Bylaws to provide that
Archipelago will not take any action, and will not permit any of its
subsidiaries (which will include PCXH, PCX, and PCXE, as well

as ArcaEx) to take any action that will cause (i) ArcaEx to cease to be
a facility of PCX and PCXE, or (ii) the FSA to cease to be in full
force and effect, unless each provision in the Certificate of
Incorporation of Archipelago that is subject to the limitations
described above is amended to provide that such provision shall remain
in full force and effect whether or not ArcaEx remains a facility of
PCX and PCXE or the FSA is in full force and effect.\84\
---------------------------------------------------------------------------

    \82\ See supra notes 8 and 11 and accompanying text.
    \83\ See supra notes 12 to 16 and accompanying text.
    \84\ Archipelago Bylaws, Proposed Section 6.8(c). See supra
notes 9 to 10 and accompanying text.
---------------------------------------------------------------------------

    In addition, as noted above in Section II.B, Archipelago represents
that, prior to the earlier of (1) the 2006 annual general meeting of
Archipelago stockholders and (2) the first meeting of Archipelago
stockholders to occur after the closing of the Merger (other than any
meeting or meetings of Archipelago stockholders convened for the
purpose of considering and approving the merger of Archipelago and the
NYSE), that its board of directors will: (a) Propose amendments to the
Certificate of Incorporation of Archipelago to (i) delete the phrase
``[f]or so long as ArcaEx remains a Facility of PCX and PCXE and the
FSA remains in full force and effect'' from each paragraph that
contains such language, and (ii) incorporate amendments to the
provisions of the Certificate of Archipelago that are currently limited
to activities of ArcaEx to cover activities of PCX and PCXE, as noted
above; \85\ (b) declare the advisability of such amendments; and (c)
direct such amendments be submitted for stockholder approval at the
earlier of (1) the 2006 annual meeting of Archipelago stockholders and
(2) the first meeting of Archipelago stockholders to occur after the
closing of the Merger (other than any meeting or meetings of
Archipelago stockholders convened for the purpose of considering and
approving the merger of Archipelago and the NYSE).\86\
---------------------------------------------------------------------------

    \85\ Articles THIRTEENTH, FOURTEENTH, SEVENTEENTH AND EIGHTEENTH
of the Certificate of Incorporation of Archipelago would need to be
so amended.
    \86\ See Notice, supra note 3.
---------------------------------------------------------------------------

    These amendments to the Archipelago Bylaws, coupled with the
undertakings of Archipelago, are designed to maintain the independence
of PCX's self-regulatory function and generally to enable the Exchange
to operate in a manner that complies with the federal securities laws,
including furthering the objectives of Sections 6(b) and 19(g) of the
Act,\87\ as well as to facilitate the ability of the Commission to
exercise appropriate oversight over the Exchange and its controlling
persons. The Commission believes that these provisions are appropriate
and consistent with the Act.
---------------------------------------------------------------------------

    \87\ 15 U.S.C. 78f(b) and 78s(g).
---------------------------------------------------------------------------

    The Commission believes that, even in the absence of these proposed
amendments and undertakings, Section 20(a) of the Act \88\ provides
that any person with a controlling interest in Archipelago would be
jointly and severally liable with and to the same extent that
Archipelago is liable under any provision of the Act, unless the
controlling person acted in good faith and did not directly or
indirectly induce the act or acts constituting the violation or cause
of action. In addition, Section 20(e) of the Act \89\ creates aiding
and abetting liability for any person who knowingly provides
substantial assistance to another person in violation of any provision
of the Act or rule thereunder, and Section 21C of the Act \90\
authorizes the Commission to enter a cease-and-desist order against any
person who has been ``a cause of'' a violation of any provision of the
Act through an act or omission that the person knew or should have
known would contribute to the violation.
---------------------------------------------------------------------------

    \88\ 15 U.S.C. 78t(a).
    \89\ 15 U.S.C. 78t(e).
    \90\ 15 U.S.C. 78u-3.
---------------------------------------------------------------------------

B. Change of Control of PCX; Ownership and Voting Limitations

1. Limited Exception To Allow Archipelago To Acquire PCXH
    As noted above, the Certificate of Incorporation of PCXH currently
contains provisions that impose limitations on direct and indirect
changes in control of PCXH that are designed to prevent any
shareholder, or any shareholders acting together, from exercising undue
control over the operations of the Exchange and to ensure that PCX,
PCXE, and the Commission are able to carry out their regulatory
obligations under the Act. These provisions include a separate,
heightened ownership restriction on any member of PCX.\91\ As a result
of the Merger, Archipelago will own 100% of the capital stock of PCXH,
which would violate the ownership and voting limitations in the current
Certificate of Incorporation of PCXH, absent an exception.\92\ Thus, to
permit Archipelago to acquire PCXH, PCX has requested that the
Commission approve a limited exception from the ownership and voting
restrictions in PCXH's Certificate of Incorporation for Archipelago and
its Related Persons, other than Related Persons that are ``prohibited
persons'' (i.e., PCX members) and that are not ``permitted persons'' or
affirmatively approved by the Commission.\93\
---------------------------------------------------------------------------

    \91\ See supra notes 22 to 24 and accompanying text, and Section
V.B of the May 2004 Order, supra note 22.
    \92\ Certificate of Incorporation of PCXH, Proposed Article
Nine, Section 4.
    \93\ Certificate of Incorporation of PCXH, Proposed Article
Nine, Section 4. See supra notes 27 to 31 and accompanying text for
a detailed definition of ``prohibited person'' and ``permitted
person.''
---------------------------------------------------------------------------

    Stockholders of Archipelago currently are subject to ownership and
voting restrictions substantially similar to those imposed on PCXH
stockholders.\94\ The heightened restrictions on members of PCX,
however, are not analogous, because the ownership restrictions
contained in the Certificate of Incorporation of Archipelago that
impose heightened restrictions on PCX members apply only to ETP
Holders.\95\ These heightened restrictions on ETP Holders were imposed
at a time when Archipelago owned and operated ArcaEx, the equities
trading facility of PCX, but not the options trading business of the
Exchange. After the Merger, however, Archipelago will also own 100% of
the Exchange. Therefore, to preserve the general applicability and
scope of the ownership and voting restrictions as they currently exist
in the Certificate of Incorporation of PCXH once Archipelago acquires
PCXH, the Exchange requests that the Commission approve changes to PCX
rules and the Archipelago Bylaws that are designed to impose
substantially similar ownership and voting requirements on
Archipelago's stockholders that are PCX members to those that currently
are imposed on PCXH stockholders that are PCX members.
---------------------------------------------------------------------------

    \94\ See supra notes 53 to 58 and accompanying text and
Certificate of Incorporation of Archipelago, Article FOURTH,
Sections C and D.
    \95\ See supra note 57 and accompanying text and Certificate of
Incorporation of Archipelago, Article FOURTH, Section D(2).
---------------------------------------------------------------------------

    Specifically, proposed PCX Rule 3.4 would impose on any OTP Holder
or OTP Firm that is not an ETP Holder voting and ownership limitations
that are analogous to those currently imposed on ETP Holders by the
Certificate of Incorporation of Archipelago. The proposed PCX rules
also would require OTP Holders, OTP Firms, and their OTP Associates to
enter into Ownership and Voting Agreements with PCX and Archipelago
pursuant to which such OTP Holder, OTP Firm or OTP Associate would
agree to comply with the ownership and voting limitations imposed by
the proposed PCX rules, to authorize Archipelago to vote their shares
of Archipelago stock in favor of amendments to the Certificate of
Incorporation of Archipelago that

incorporate such ownership and voting limitations, and to be subject to
the disciplinary action in the proposed PCX rules if they violate any
of the ownership and voting limitations or fail to enter into such
Ownership and Voting Agreement.\96\ Under the proposed rules, failure
to comply with the ownership and voting limitations or failure to enter
into the Ownership and Voting Agreement as required would subject the
responsible OTP or OTP Firm to the suspension of all trading rights and
privileges, unless such violation is cured within a limited time
period.\97\
---------------------------------------------------------------------------

    \96\ Proposed PCX Rule 3.4(c).
    \97\ See supra note 67 and proposed PCX Rule 13.2(a)(2)(E). PCX
also proposes amendments to the Archipelago Bylaws that will
prohibit the board of directors of Archipelago from waiving the 40%
ownership limitation, the Archipelago Certificate Voting Limitation
and the Archipelago Certificate Non-Voting Agreement Prohibition
relating to any OTP Holder, OTP Firm, or any of their related
persons. See supra note 72 and accompanying text. In addition, PCX
proposes to amend the Archipelago Bylaws to provide that Archipelago
will not take any action, and will not permit any of its
subsidiaries to take any action that will cause (i) ArcaEx to cease
to be a facility of PCX and PCXE, or (ii) the FSA to cease to be in
full force and effect, unless each provision in the Certificate of
Incorporation of Archipelago that is subject to this limitation,
including the provision relating to ownership by ETP Holders, is
amended to provide that such provision shall remain in full force
and effect whether or not ArcaEx remains a facility of PCX and PCXE
or the FSA is in full force and effect. Archipelago also undertakes
that its board of directors would: (a) Propose amendments to the
Certificate of Incorporation of Archipelago to (i) extend the
application of voting and ownership limitations imposed on ETP
Holders currently contained in the Certificate of Incorporation of
Archipelago to OTP Holders and OTP Firms and (ii) delete the phrase
``[f]or so long as ArcaEx remains a Facility of PCX and PCXE and the
FSA remains in full force and effect'' from each paragraph that
contains such language; (b) declare the advisability of such
amendments; and (c) direct such amendments be submitted for
stockholder approval. See supra notes 10 and 17 to 19 and
accompanying text.
---------------------------------------------------------------------------

    The Commission believes that the ownership and voting restrictions
on OTP Holders and OTP Firms in the proposed PCX rules and the
Ownership and Voting Agreement, along with the amendment to the
Archipelago Bylaws that would prohibit the waiver of the 40% ownership
limitations, Archipelago Certificate Voting Limitation and the
Archipelago Certificate Non-Voting Agreement Prohibiting for OTP
Holders, OTP Firms and their related persons, are reasonable and
consistent with the Act. Members that trade on an exchange or through
the facility of an exchange traditionally have ownership interests in
such exchange or facility. As the Commission has noted in the past,
however, a member's interest in an exchange could become so large as to
cast doubt on whether the exchange can fairly and objectively exercise
its self-regulatory responsibilities with respect to that member. A
member that is a controlling shareholder of an exchange might be
tempted to exercise that controlling influence by directing the
exchange to refrain from, or the exchange may hesitate to, diligently
monitor and surveil the member's conduct or diligently enforce its
rules and the federal securities laws with respect to conduct by the
member that violates such provisions.
    The proposed amendments to PCX rules and the Archipelago Bylaws
that would extend ownership and voting limitations to non-ETP Holder
members of PCX substantially similar to those that currently exist for
ETP Holders, coupled with the existing ownership and voting limitations
contained in the Certificate of Incorporation of Archipelago, are
designed to preserve the current limitations on direct and indirect
control of the Exchange, once Archipelago acquires PCXH. The Commission
therefore believes it is appropriate and consistent with the Act to
allow a limited exception from the PCXH ownership and voting
limitations for Archipelago and certain of its Related Persons, to
allow Archipelago to own 100% of PCXH. These proposed changes will help
ensure that, upon consummation of the Merger, the public company nature
of Archipelago will not unduly interfere with or restrict the
regulatory oversight responsibilities of the Commission or PCX with
respect to the options and equities business of the Exchange.
2. Exceptions for Members That Are Related Persons of Archipelago
    Archipelago's 100% ownership of PCXH also would cause any member of
PCX that is a Related Person of Archipelago (for instance, any member
that is wholly owned by Archipelago) to exceed the ownership and voting
limitations contained in the Certificate of Incorporation of PCXH. As
noted above, the proposed exception from the ownership and voting
restrictions contained in the Certificate of Incorporation of PCXH
would apply to Archipelago and its Related Persons. The proposed
exception would not, however, cover any Related Person that is a
``prohibited person''--i.e., an ETP Holder, OTP Holder, or OTP Firm--
other than those members that are considered ``permitted persons'' or
specifically approved by the Commission. Permitted persons would
include: (A) Any broker or dealer approved by the Commission after June
20, 2005 to be a facility of PCX; (B) any person which has been
approved by the Commission prior to it becoming subject to the
provisions of Article Nine of the Certificate of Incorporation of PCXH
with respect to the voting and ownership of shares of PCXH capital
stock by such person; and (C) any person which is a related person of
Archipelago solely by reason of beneficially owning, either alone or
together with its Related Persons, less than 20% of the outstanding
shares of Archipelago capital stock.\98\ The proposed Section 4 of
Article Nine of the Certificate of Incorporation of PCXH would further
provide that any other prohibited person not covered by the definition
of a permitted person who would be subject to and exceed the voting and
ownership limitations imposed by Article Nine as of the date of the
closing of the Merger would be permitted to exceed the voting and
ownership limitations imposed by Article Nine only to the extent and
for the time period approved by the Commission.\99\
---------------------------------------------------------------------------

    \98\ Certificate of Incorporation of PCXH, Proposed Article
Nine, Section 4.
    \99\ Id.
---------------------------------------------------------------------------

    The Commission believes it is appropriate and consistent with the
Act to exclude from the scope of the proposed exception to the PCXH
ownership and voting limitations those Related Persons of Archipelago
that are members of PCX, other than those that are specifically
approved by the Commission or that are Related Persons solely because
of their limited ownership of Archipelago stock, so as to help prevent
a member or members of PCX from exercising undue influence over, or
interfering with the operation and self-regulatory function, of the
Exchange.
    As detailed above, Archipelago currently owns or is affiliated with
several member of PCX.\100\ By virtue of their affiliation with
Archipelago, these members would exceed the ownership and voting
limitations in the Certificate of Incorporation of PCXH after
Archipelago's acquisition of PCXH, absent an exception. These PCX
members, however, would be excluded from the proposed exception to
PCXH's ownership and voting limitations (and thus, Archipelago would be
required to divest its interest in such PCX members) unless they are
affirmatively approved by the Commission.
---------------------------------------------------------------------------

    \100\ See supra Section II.C.1.
---------------------------------------------------------------------------

a. Outbound Router
    PCX has specifically requested that the Commission approve an
exception for Archipelago Securities' Outbound

Router function as a facility of the Exchange, pursuant to several
conditions and undertakings. First, Archipelago Securities is, and will
continue to be operated and regulated as, a facility of PCX. As a
facility of PCX, PCX would be responsible for regulating the Outbound
Router function as an exchange facility subject to Section 6 of the
Act, and the Outbound Router function would be subject to the
Commission's continuing oversight. Archipelago's performance of its
Outbound Router function would have to be in compliance with PCX's
rules.
    Second, the scope of the exception would be limited to the Outbound
Router function, i.e., routing orders entered into ArcaEx to other
Market Centers in compliance with PCXE rules. In addition, another
unaffiliated SRO (the NASD) would continue to have primary regulatory
oversight responsibility for Archipelago Securities pursuant to Rules
17d-1 and 17d-2 under the Act. The Commission emphasizes that PCX has
undertaken to amend the NASD PCX Agreement \101\ within 90 days of the
Commission's approval of this proposed rule change to expand the scope
of the NASD's regulatory functions under the NASD PCX Agreement so as
to encompass all of the regulatory oversight and enforcement
responsibilities with respect to Archipelago Securities pursuant to
applicable laws, except for real-time market surveillance.\102\
Finally, the continued use of the Outbound Router function also will
remain optional for other PCX members.\103\
---------------------------------------------------------------------------

    \101\ The Commission notes that such amendment of the NASD PCX
Agreement is required to be filed with the Commission pursuant to
Rule 17d-2 under the Act.
    \102\ In Amendment No. 2, PCX clarified that real-time market
surveillance means marketplace regulation and marketplace
surveillance, including surveillance and enforcement related to PCXE
trading rules, PCX and PCXE rules relating to trading on ArcaEx, and
Commission rules relating to trading.
    \103\ See supra note 38 and accompanying text.
---------------------------------------------------------------------------

    Although the Commission is concerned about potential unfair
competition and conflicts of interest between an exchange's self-
regulatory obligations and its commercial interests when the exchange
is affiliated with one of its members, the Commission believes that it
is appropriate and consistent with the Act to permit Archipelago to
continue to own and operate Archipelago Securities, in its capacity as
a facility of PCX that routes orders from ArcaEx to other Market
Centers, in light of the protections afforded by the conditions
described above.
b. Inbound Router
    PCX also has requested a temporary exception from the ownership and
voting limitations for the Inbound Router functions of Wave until
December 31, 2005, and for Arca Trading until the earlier of March 31,
2006 and the closing of Archipelago's pending merger with the
NYSE.\104\ These temporary exceptions would be subject to several
conditions, as proposed. The operation of both Wave and Arca Trading's
Inbound Router functions during the interim periods will continue to be
subject to Archipelago's current information barriers between Wave and
Arca Trading on the one hand and PCX, PCXE, and other subsidiaries of
Archipelago that are facilities of PCX or PCXE on the other hand.\105\
The Commission also notes that both Wave and Arca Trading are members
of the NASD as well as PCX, that the NASD is the DEA for both Wave and
Arca Trading, and that Wave and Arca Trading are, and will continue to
be during the interim periods, covered by the scope of the NASD PCX
Agreement.\106\ In addition, during the interim period, the amount of
revenue that Archipelago can earn from the operation of Arca Trading
will not exceed 7% of its consolidated revenues, measured on a
quarterly basis, and the Inbound Router function of Arca Trading will
not accept any new clients following the closing of the Merger.
---------------------------------------------------------------------------

    \104\ See supra notes 43 and 44 and accompanying text.
    \105\ See PCXE Rule 14.3.
    \106\ The Exchange confirmed that Wave and Arca Trading are, and
will continue to be during the interim periods, covered by the scope
of the NASD PCX Agreement. Telephone conversation between Kathryn
Beck, General Counsel, PCX and David Hsu, Special Counsel, Division,
Commission, on September 19, 2005.
---------------------------------------------------------------------------

    The affiliation of an exchange with one of its members that
provides inbound access to the exchange--in direct competition with
other members of the exchange--raises potential conflicts of interest
between the exchange's regulatory responsibilities and its commercial
interests, and the potential for unfair competitive advantage that the
affiliated member could have by virtue of informational or operational
advantages, or the ability to receive preferential treatment. In light
of the conditions that would be imposed during the interim period that
are designed to mitigate potential conflicts of interest and the
potential for unfair competitive advantage, the Commission believes it
is appropriate and consistent with the Act to allow such a limited,
temporary exception.\107\
---------------------------------------------------------------------------

    \107\ The Commission believes that an Inbound Router function
provided by an affiliated member of an exchange would be a facility
of the exchange under Section 3(a)(2) of the Act, 15 U.S.C.
78c(a)(2), and would be regulated as such.
---------------------------------------------------------------------------

c. Other PCX Members That Are Related Persons of Archipelago
    As noted above in Section II.C.1.c., in addition to its Inbound
Router function, Arca Trading provides the ATS OTC function,\108\ and
Archipelago Securities also provides the DOT function in addition to
its Outbound Router function.\109\ PCX requests the Commission's
approval for an exception for Arca Trading to allow Archipelago to
continue to own all of its ownership interest in and operate the ATS
OTC function on a pilot basis for a period of 60 days following the
Merger. PCX also requests an exception for Archipelago Securities to
permit Archipelago to continue to own all of its ownership interest in
and operate the DOT function of Archipelago Securities on a pilot basis
until the earlier of (1) a period of 60 days following the closing of
the Merger, and (2) the closing date of the proposed merger of
Archipelago and the NYSE (provided that in no event will PCX or
Archipelago request that this exception be extended beyond the closing
date of the merger of Archipelago and the NYSE).\110\ The Commission
believes it is reasonable and consistent with the Act to approve these
exceptions on a pilot basis, which will provide the public and other
interested parties an opportunity to comment on the exceptions prior to
any such exception being made permanent.
---------------------------------------------------------------------------

    \108\ See supra note 48 and accompanying text and Amendment No.
2.
    \109\ See supra note 49 and accompanying text and Amendment No.
2.
    \110\ See Amendment No. 2.
---------------------------------------------------------------------------

    With respect to the ATS OTC function, the Commission notes that in
its adoption of Regulation ATS, it stated that exchanges could form
subsidiaries that operate ATSs registered as broker-dealers. The
Commission noted that such subsidiaries would of course be required to
become members of a national securities association or another national
securities exchange. The Commission also stated that any subsidiary or
affiliate ATS could not integrate, or otherwise link the ATS with the
exchange, including using the premises or property of such exchange for
effecting or reporting a transaction,

without being considered a facility of the exchange.\111\
---------------------------------------------------------------------------

    \111\ See Securities Exchange Act Release No. 40760 (December 8,
1998), 63 FR 70844 (December 22, 1998) at 70891.
---------------------------------------------------------------------------

    Finally, PCX requests the Commission's approval for a temporary
exception for Terra Nova until December 31, 2005 to allow Gerald D.
Putnam (the Chairman and CEO of Archipelago) to continue to own in
excess of 5% of Terra Nova and continue to serve as a director of TAL
following the Merger.\112\ The Commission believes that such a
temporary exception is appropriate and consistent with the Act because
it will eliminate the affiliation between Terra Nova and Archipelago
but allow Mr. Putnam a reasonable amount of time to effectuate such
actions necessary to eliminate the affiliation.
---------------------------------------------------------------------------

    \112\ See supra note 45 and accompanying text and Amendment No.
2.
---------------------------------------------------------------------------

C. Response to Comments

    The Commission received one comment letter on the proposed rule
change.\113\ This commenter raises a concern regarding the level of
change to the structure of the Exchange's options market that it
believes Archipelago intends to undertake once the Merger has been
completed, and the fact that Archipelago and PCX have not informed the
Commission of their intent in connection with this proposed rule
change. In particular, the commenter believes that the intended rule
changes will align the PCX market with an existing ``ECN-style'' market
structure of ArcaEx. The commenter recommends that the Commission not
approve the pending merger while it investigates whether the intended
rule changes will benefit the investing public.
---------------------------------------------------------------------------

    \113\ See supra note 4.
---------------------------------------------------------------------------

    Pursuant to Section 19(b)(2) of the Act,\114\ the Commission is
required to approve a proposed rule change on Form 19b-4 filed by an
SRO pursuant to Rule 19b-4 under the Act \115\ if it finds that such
proposed rule change is consistent with the requirements of the Act and
the rules and regulations thereunder applicable to the SRO. PCX is not
proposing to change its options market structure in this filing. The
Commission has only considered whether the changes proposed by PCX in
this rule filing are consistent with the Act. Similarly, the Commission
would evaluate any future proposals by PCX to change its options rules
pursuant to the statutory standards in Section 19(b)(2) of the
Act.\116\
---------------------------------------------------------------------------

    \114\ 15 U.S.C. 78s(b)(2).
    \115\ 17 CFR 240.19b-4.
    \116\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

V. Accelerated Approval of Amendment No. 2

    Pursuant to Section 19(b)(2) of the Act,\117\ the Commission may
not approve any proposed rule change, or amendment thereto, prior to
the thirtieth day after the date of publication of the notice thereof,
unless the Commission find good cause for so finding. The Commission
hereby find good cause for approving Amendment No. 2 to the proposed
rule change prior to the thirtieth day after publishing notice of
Amendment No. 2 in the Federal Register pursuant to Section 19(b)(2) of
the Act.\118\ Specifically, in Amendment No. 2, the Exchange: (1)
Revised Form 19b-4 to reflect actions by the stockholders of PCXH
approving the Merger on September 13, 2005; (2) made certain technical,
non-substantive corrections to the text of the proposed rule change;
(3) clarified the scope of the term ``real-time market surveillance''
in its discussion of the scope of the NASD PCX Agreement; (4) clarified
the relationship between Archipelago and Wave, Archipelago and Terra
Nova, Terra Nova and TAL, and Archipelago and White Cap in relation to
its requests for temporary exceptions from the PCXH ownership and
voting requirements; and (5) provided that the temporary exception it
had requested for Wave in the Notice would be subject to a condition
that Archipelago will continue to maintain and comply with its existing
information barriers. These changes in items (1), (2), (3), and (4) are
technical or non-substantive in nature, and the change in item (5)
would provide additional safeguards for the proposed exception for
Wave's Inbound Router function, and raise no new novel issues.
---------------------------------------------------------------------------

    \117\ 15 U.S.C. 78s(b)(2).
    \118\ Id.
---------------------------------------------------------------------------

    In Amendment No. 2, the Exchange also included a request for a
temporary exception from the PCXH ownership and voting requirements for
the Inbound Router function of Arca Trading and the related clearing
function performed by Archipelago Securities, subject to certain
conditions as outlined above in Section II.C.1.b. The Commission
believes that good cause exists to accelerate approval of this
exception because it is limited in duration (i.e., Archipelago must
divest its ownership interest or cease operations by March 31, 2006 at
the latest) and subject to several conditions that are designed to
mitigate any potential conflicts of interest between the ownership and
operation by Archipelago of the Inbound Router function of Arca Trading
and the self-regulatory function of PCX and the operation of ArcaEx, as
well as any potential for unfair competitive advantage.
    Finally, in Amendment No. 2 the Exchange requested (1) an exception
on a 60 day pilot basis for Archipelago to be able to continue to own
and operate an ATS for the trading of over-the-counter bulletin board
securities not traded on any exchange and (2) an exception on a pilot
basis until the earlier of (a) 60 days and (b) the closing of the
pending merger between Archipelago and the NYSE for Archipelago to be
able to continue to own and operate, through Archipelago Securities, a
service that provides direct connectivity to the NYSE through the DOT
system. The Commission believes that good cause exists to approve these
two exceptions on a pilot basis because the public and other interested
parties will have the opportunity to comment on the substance of the
exceptions before permanent approval, if permanent approval is
requested.
    Therefore, the Commission finds that good cause exists to
accelerate approval of Amendment No. 2 to the proposed rule change,
pursuant to Section 19(b)(2) of the Act.\119\
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    \119\ Id.
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VI. Conclusion

    For the foregoing reasons, the Commission finds that the proposed
rule change, as amended, is consistent with the requirement of the Act
the rules and regulations thereunder.
    It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\120\ that: (1) The proposed rule change (SR-PCX-2005-90) and
Amendment No. 1 thereto are approved; (2) Amendment No. 2 thereto is
approved on an accelerated basis; (3) the exception for the ATS OTC
Function of Arca Trading is approved on a pilot basis for a period of
60 days following the closing of the Merger; (4) the exception for the
DOT Function of Archipelago Securities is approved on a pilot basis
until the earlier of (i) a period of 60 days following the closing of
the Merger, and (ii) the closing date of the proposed merger of
Archipelago and the NYSE; (5) the temporary exception for Wave is
approved until December 31, 2005; (6) the temporary exception for the
Inbound Router function of Arca Trading and the related clearing
function of Archipelago Securities is approved until the earlier of
March 31, 2006 and the closing date of the proposed merger of
Archipelago and the NYSE; and (7) the temporary exception

for Terra Nova is approved until December 31, 2005.
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    \120\ Id.

    For the Commission, by the Division of Market Regulations,
pursuant to delegated authority.\121\
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    \121\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
 [FR Doc. E5-5314 Filed 9-28-05; 8:45 am]

BILLING CODE 8010-01-P