[Federal Register Volume 75, Number 121 (Thursday, June 24, 2010)]
[Notices]
[Pages 36136-36138]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-15285]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-62304; File No. SR-NYSEArca-2010-31]
Self-Regulatory Organizations; NYSE Arca, Inc.; Order Approving
Proposed Rule Change To Amend NYSE Arca Rule 3.3(a) and Section 401(a)
of the Exchange's Bylaws To Eliminate the Exchange's Audit Committee,
Compensation Committee, and Regulatory Oversight Committee
June 16, 2010.
On April 20, 2010, NYSE Arca, Inc. (``NYSE Arca'' or ``Exchange'')
filed with the Securities and Exchange Commission (``Commission'')
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to
amend NYSE Arca Rule 3.3(a) and Section 401(a) of the Exchange's Bylaws
to eliminate the Exchange's Audit Committee, Compensation Committee,
and Regulatory Oversight Committee. The proposed rule change was
published for comment in the Federal Register on May 11, 2010.\3\ The
Commission received no comments regarding the proposal. This order
approves the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 62032 (May 4, 2010),
75 FR 26304 (``Notice'').
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I. Description of the Proposed Rule Change
Currently, the Board of Directors of the Exchange and its ultimate
parent company, NYSE Euronext, each maintain its own Audit Committee
and Compensation Committee. As more fully discussed in the Notice, the
Exchange states that it has found that the work of these committees
overlaps substantially.\4\ As a result, the Exchange has proposed to
revise its Bylaws to allow for the elimination of its Audit and
Compensation Committees. In addition, the Exchange has proposed to
eliminate its Regulatory Oversight Committee (``ROC''), and in lieu
thereof, provide that the Board of NYSE
[[Page 36137]]
Regulation, Inc. (``NYSER'') \5\ and the Board of the Exchange each
will exercise a portion of the current responsibilities of the ROC,
with the Board of the Exchange retaining ultimate legal responsibility
for the regulation of its permit holders \6\ and its market.\7\
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\4\ See Notice, supra note 3.
\5\ NYSER is a not-for-profit indirect subsidiary of NYSE
Euronext.
\6\ Permit holders at the Exchange are ``members'' of the
Exchange as that term is defined in Section 3 of the Act.
\7\ These arrangements are set forth in various regulatory
services agreements. See infra note 16 and accompanying text.
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II. Discussion and Commission Findings
After careful review, the Commission finds that the proposed rule
change is consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities exchange.\8\
In particular, the Commission finds that the proposed rule change is
consistent with Section 6(b)(1) of the Act,\9\ which requires a
national securities exchange to be so organized and have the capacity
to carry out the purposes of the Act and to comply, and to enforce
compliance by its members and persons associated with its members, with
the provisions of the Act. The Commission also finds that the proposed
rule change is consistent with Section 6(b)(5) of the Act,\10\ in that
it is designed, among other things, to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, to remove impediments to and perfect the mechanism
of a free and open market and a national market system, and, in
general, to protect investors and the public interest. The Commission
has previously approved a structure in which certain committees of the
Board of NYSE Euronext, including its Audit and Compensation
Committees, were authorized to perform functions for subsidiaries of
NYSE Euronext, including the New York Stock Exchange, LLC
(``NYSE''),\11\ and NYSE Amex, Inc. (``NYSE Amex'').\12\ The Commission
has also previously approved a structure for NYSE Amex in which the
Board of NYSER and the Board of NYSE Amex each exercise a portion of
the Regulatory Oversight Committee responsibilities for NYSE Amex, with
NYSE Amex retaining ultimate legal responsibility for the regulation of
its permit holders and its market.\13\
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\8\ In approving this proposed rule change, the Commission notes
that it has considered the proposed rule's impact on efficiency,
competition, and capital formation. See 15 U.S.C. 78c(f).
\9\ 15 U.S.C. 78f(b)(1).
\10\ 15 U.S.C. 78f(b)(5).
\11\ See Securities Exchange Act Release No. 55293 (February 14,
2007), 72 FR 8033 (February 22, 2007) (SR-NYSE-2006-120).
\12\ See Securities Exchange Act Release No. 58673 (September
29, 2008), 73 FR 57707 (October 3, 2008) (SR-Amex-2008-62, SR-NYSE-
2008-60) (``NYSE Amex Approval Order'').
\13\ See id.
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The NYSE Arca Audit Committee. Under current Exchange Rule
3.3(a)(3)(B), the primary functions of the NYSE Arca Audit Committee
are (i) to conduct an annual review with the independent auditors, to
determine the scope of their examination and the cost thereof; (ii) to
periodically review with the independent auditors and the internal
auditor the Exchange's internal controls and the adequacy of the
internal audit program; (iii) to review the annual reports submitted
both internally and externally, and take such action with respect
thereto as it may deem appropriate, and (iv) to recommend to the Board
of NYSE Arca independent public accountants as auditors of the Exchange
and its subsidiaries.
The NYSE Euronext Audit Committee is responsible under its charter
for assessing the effectiveness of the internal audit function and
reviewing with management and the independent auditor any major issues
as to the adequacy of NYSE Euronext's internal risk management and
internal controls, as well as meeting to review and discuss with
management and the independent auditor NYSE Euronext's annual audited
financial statements, quarterly financial statements prior to the
filing of Form 10-Q, and significant financial reporting issues and
judgments made in connection with the preparation of the financial
statements.
In connection with this proposal, the Exchange represents that: (i)
The specific responsibilities of the NYSE Euronext Audit Committee, as
well as numerous others in its charter relating to oversight of both
the independent and internal auditors, financial statement and
disclosure matters, and corporate oversight, result in the
responsibilities of the NYSE Arca Audit Committee being fully
duplicated by the responsibilities of the NYSE Euronext Audit
Committee; (ii) the NYSE Euronext Audit Committee will continue to be
composed at all times of independent directors and will continue to
review the financial condition of the Exchange as part of its oversight
of the financial processes of NYSE Euronext and of each of its
consolidated subsidiaries; (iii) NYSER has broad authority to oversee
the regulatory activities of the Exchange and the other self-regulatory
organizations whose ultimate parent is NYSE Euronext, through delegated
authority and regulatory services agreements; (iv) it is the practice
of NYSE Euronext's Global Risk and Audit Services Department (``RAS''),
which performs internal audit functions, to report to the NYSER Board
on all internal audit matters relating to the Exchange's regulatory
responsibilities, and to ensure that NYSER has the appropriate
authority to oversee RAS's activities with respect to the Exchange's
regulatory responsibilities pursuant to the provisions of the RSA
between the Exchange and NYSER; (v) RAS's written procedures will be
amended to stipulate that the NYSER Board of Directors may, at any
time, request that RAS conduct an audit of a matter of concern to it
and report the results of the audit both to the NYSER Board of
Directors and the NYSE Euronext Audit Committee; (vi) the chief
regulatory officer of the Exchange would be in attendance at any
meeting of the NYSER Board of Directors at which the results of any
such audit would be reported by RAS; and (vii) the Exchange retains the
authority to direct NYSER to request that RAS conduct such an audit of
a matter of concern to it.
The Commission notes that the proposed elimination of the NYSE Arca
Audit Committee is comparable to a structure for NYSE and NYSE Amex
that the Commission has previously considered and approved.\14\ The
Commission finds that the proposed elimination of the NYSE Arca Audit
and Compensation committees is consistent with the Act.
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\14\ See supra notes 11 and 12.
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NYSE Arca Compensation Committee. The Exchange also proposes to
eliminate its Compensation Committee, and to prescribe that the
functions of that committee be performed by the NYSE Euronext Human
Resources and Compensation Committee. Pursuant to current Exchange Rule
3.3(a)(4)(B), the NYSE Arca Compensation Committee is required to (i)
review and approve corporate goals and objectives relevant to the
Exchange CEO's compensation; (ii) evaluate the CEO's performance in
light of those goals and objectives; (iii) set the CEO's compensation
level based on this evaluation; and (iv) make recommendations to the
Exchange's Board of Directors with respect to the design of incentive
compensation and equity-based plans. As more fully set forth in the
Notice, the Exchange represents that the NYSE Arca Compensation
Committee's assigned responsibilities with respect to
[[Page 36138]]
compensation and personnel matters overlap with the broader mandate of
the NYSE Euronext Human Resources and Compensation Committee. The
Commission notes that the proposed elimination of the NYSE Arca
Compensation Committee is comparable to a structure for NYSE and NYSE
Amex that the Commission has previously considered and approved.\15\
The Commission finds that the proposed elimination of the NYSE Arca
Compensation Committees is consistent with the Act.
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\15\ See supra note 12.
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Elimination of NYSE Arca Regulatory Oversight Committee
The Exchange also proposes to eliminate its ROC, and in lieu
thereof, provide for the exercise of the current formal
responsibilities of the ROC to be divided between the NYSER Board and
the Exchange's Board. Currently, the ROC is responsible for ensuring
(i) the independence of Exchange regulation; (ii) adequate resources
for the Exchange to properly fulfill its self-regulatory obligations;
and (iii) that Exchange management fully supports the execution of the
regulatory process.
In support of its proposal to eliminate the ROC, the Exchange
represents that it has previously entered into an RSA with NYSER to
perform all of the Exchange's regulatory functions on the Exchange's
behalf; that the Financial Industry Regulatory Authority (``FINRA'')
performs some of the regulatory functions contracted out to NYSER
pursuant to a separate multi-party regulatory services agreement with
FINRA; \16\ and that these regulatory contractual arrangements closely
parallel the regulatory arrangements for NYSE Amex that the Commission
reviewed and approved in the NYSE Amex Approval Order.\17\ The Exchange
states that the proposed elimination of its ROC will result in
regulatory arrangements similar to those approved for NYSE Amex. In
addition to the foregoing, the Exchange specifically represents that
(i) NYSER will provide a comparable level of independence as that of a
ROC; (ii) NYSE Euronext has agreed to provide adequate funding to NYSE
Regulation to conduct its regulatory activities with respect to the
Exchange; and (iii) notwithstanding its regulatory agreements, the
Exchange retains ultimate legal responsibility for the regulation of
its permit holders and its market and has full authority to take action
to assure that its regulatory responsibilities are met. Acknowledging
that it retains ultimate legal responsibility, the Exchange has further
stated that its Board of Directors will directly assume the ROC's
current formal responsibility to ensure that Exchange management fully
supports the execution of the regulatory process and that it retains
the authority to direct NYSER and FINRA to take any action necessary to
fulfill the Exchange's statutory and self-regulatory obligations.
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\16\ The Commission notes that on June 14, 2010, NYSE, NYSER,
NYSE Amex, and NYSE Arca (``NYSE Parties'') entered into a new
multi-party regulatory services agreement with FINRA, pursuant to
which FINRA will perform additional regulatory functions on behalf
of the NYSE Parties, including market surveillance and enforcement
activities. See http://www.nyse.com/press/1276509404802.html. See
also June 16, 2010 e-mail correspondence from William Love, Chief
Counsel, NYSE Euronext, to Heidi Pilpel, Special Counsel,
Commission.
\17\ See supra note 12.
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The Commission notes that the proposed elimination of the NYSE Arca
ROC is comparable to the structure that the Commission approved in the
NYSE Amex Approval Order.\18\ The Commission finds that the proposed
elimination of the NYSE Arca ROC is consistent with the Act.
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\18\ See supra note 12.
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III. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\19\ that the proposed rule change (SR-NYSEArca-2010-31) be, and it
hereby is, approved.
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\19\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\20\
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\20\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-15285 Filed 6-23-10; 8:45 am]
BILLING CODE 8010-01-P