Notices. SECURITIES AND EXCHANGE COMMISSION

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BILLING CODE 7710-FW-M SECURITIES AND EXCHANGE COMMISSION [SEC File No. 270-453; OMB Control No. 3235-0510] Submission for OMB Review; Comment Request; Extension: Rule 302 Notice is hereby given that pursuant to the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 *et seq.* ), the Securities and Exchange Commission (“Commission”) has submitted to the Office of Management and Budget a request for extension of the previously approved collection of information discussed below. Regulation ATS (17 CFR 242.300 *et seq.* ) of the Securities Exchange Act of 1934 (15 U.S.C. 78a *et seq.* ) provides a regulatory structure that directly addresses issues related to alternative trading systems' role in the marketplace.

Regulation ATS allows alternative trading systems to choose between two regulatory structures. Alternative trading systems have the choice between registering as broker-dealers and complying with Regulation ATS or registering as national securities exchanges. Rule 302 of Regulation ATS describes the recordkeeping requirements for alternative trading systems that are not national securities exchanges. Under Rule 302, alternative trading systems are required to make a record of subscribers to the alternative trading system, daily summaries of trading in the alternative trading system, and time-sequenced records of order information in the alternative trading system.

The information required to be collected under the Rule should increase the abilities of the Commission, state securities regulatory authorities, and the SROs to ensure that alternative trading systems are in compliance with Regulation ATS as well as other rules and regulations of the Commission and the SROs. If the information is not collected or collected less frequently, the Commission would be severely limited in its ability to comply with its statutory obligations, provide for the protection of investors and promote the maintenance of fair and orderly markets.

Respondents consist of alternative trading systems that choose to register as broker-dealers and comply with the requirements of Regulation ATS. The Commission estimates that there are currently approximately 65 respondents. An estimated 65 respondents will spend approximately 2,340 hours per year (65 respondents at 36 burden hours/respondent) to comply with the recordkeeping requirements of Rule 302. At an average cost per burden hour of $86.54, the resultant total related cost of compliance for these respondents is $202,504.00 per year (2,340 burden hours multiplied by $86.54/hour; a slight discrepancy is due to arithmetic rounding).

Compliance with Rule 302 is mandatory. The information required by the Rule 302 is available only to the examination of the Commission staff, state securities authorities and the SROs. Subject to the provisions of the Freedom of Information Act, 5 U.S.C. 522, and the Commission's rules thereunder (17 CFR 200.80(b)(4)(iii)), the Commission does not generally publish or make available information contained in any reports, summaries, analyses, letters, or memoranda arising out of, in anticipation of, or in connection with an examination or inspection of the books and records of any person or any other investigation.

Regulation ATS requires alternative trading systems to preserve any records, for at least three years, made in the process of complying with the systems capacity, integrity and security requirements. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid control number. Comments should be directed to

(i)Desk Officer for the Securities and Exchange Commission, Office of Information and Regulatory Affairs, Office of Management and Budget, Room 10102, New Executive Office Building, Washington, DC 20503 or by sending an e-mail to: *David_Rostker@omb.eop.gov* ; and

(ii)R. Corey Booth, Director/Chief Information Officer, Securities and Exchange Commission, c/o Shirley Martinson, 6432 General Green Way, Alexandria, VA 22312 or send an e-mail to: *PRA_Mailbox@sec.gov* . Comments must be submitted within 30 days of this notice. Dated: July 23, 2007. Florence E. Harmon, Deputy Secretary. [FR Doc. E7-14845 Filed 7-31-07; 8:45 am] BILLING CODE 8010-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-56134; File No. SR-CTA-2007-01] Consolidated Tape Association; Notice of Filing of the Ninth Charges Amendment to the Second Restatement of the Consolidated Tape Association Plan July 25, 2007. Pursuant to section 11A of the Securities Exchange Act of 1934 (“Act”), 1 and Rule 608 thereunder, 2 notice is hereby given that on July 20, 2007, the Consolidated Tape Association (“CTA”) Plan Participants (“Participants”) 3 filed with the Securities and Exchange Commission (“SEC” or “Commission”) a proposal to amend the Second Restatement of the CTA Plan (the “Plan”). 4 The proposal represents the ninth charges amendment to the Plan (“Ninth Charges Amendment”) and reflects changes unanimously adopted by the Participants. The proposed amendment would impose a limit on the maximum amount that any entity is required to pay for any calendar month's charge for broadcast, cable or satellite television distribution of a Network A ticker. The Commission is publishing this notice to solicit comments from interested persons on the proposed Ninth Charges Amendment to the Plan. 1 15 U.S.C. 78k-1. 2 17 CFR 242.608. 3 Each Participant executed the proposed amendment. The Participants are the American Stock Exchange LLC; Boston Stock Exchange, Inc.; Chicago Board Options Exchange, Inc.; Chicago Stock Exchange, Inc.; International Securities Exchange, LLC; The NASDAQ Stock Market LLC; National Association of Securities Dealers, Inc.; National Stock Exchange, Inc.; New York Stock Exchange LLC.; NYSE Arca, Inc.; and Philadelphia Stock Exchange, Inc. 4 The proposal was originally filed on June 19, 2007. However, it was refiled on July 20, 2007, to reflect technical revisions made in response to the Commission's staff comments. I. Rule 608(a) A. Description and Purpose of the Amendment The Plan currently imposes a charge of $2.00 for every 1,000 households reached on broadcast, cable and satellite television distribution of a Network A ticker (the “Broadcast Charge”). A minimum monthly vendor payment of $2,000 applies. CTA permits prorating for those who broadcast the data for less than the entire business day, based upon the number of minutes that the vendor displays the real-time ticker, divided by the number of minutes the primary market is open for trading (currently 390 minutes). The Ninth Charges Amendment proposes to cap the Broadcast Charge by providing that no entity is required to pay more than the “Television Ticker Maximum” for any calendar month. For months falling in calendar year 2007, the Participants propose that the monthly “Television Ticker Maximum” shall be $150,000. For each subsequent calendar year, the monthly Television Ticker Maximum would increase by the “Annual Increase Amount.” The “Annual Increase Amount” is an amount equal to the percentage increase in the annual composite share volume for the preceding calendar year, subject to a maximum annual increase of five percent. The “Annual Increase Amount” is the same adjustment factor that the Network A rate schedule has long applied to the monthly broker-dealer enterprise fee. B. Additional Information Required by Rule 608(a) 1. Governing or Constituent Documents Not applicable. 2. Implementation of the Amendment The Participants have notified the vendors that would be affected by the proposed amendment. The Participants propose to apply the monthly maximum amount that any entity is required to pay for any calendar month's Broadcast Charge retroactively to May 1, 2007. 3. Development and Implementation Phases See Item I(B)(2) above. 4. Analysis of Impact on Competition The amendment will impose no burden on competition. 5. Written Understanding or Agreements relating to Interpretation of, or Participation in, Plan The Participants have no written understandings or agreements relating to interpretation of the Plan as a result of the amendment. 6. Approval by Sponsors in Accordance With Plan Under Section IV(b) of the Plan, each Plan Participant must execute a written amendment to the Plan before the amendment can become effective. The amendment is so executed. 7. Description of Operation of Facility Contemplated by the Proposed Amendment a. Terms and Conditions of Access Not applicable. b. Method of Determination and Imposition, and Amount of, Fees and Charges The Participants believe that the proposed cap on Broadcast Charges is fair and reasonable and provides for an equitable allocation of dues, fees, and other charges among vendors, data recipients and other persons using CTA Network A facilities. c. Method of Frequency of Processor Evaluation Not applicable. d. Dispute Resolution Not applicable. II. Rule 601(a) A. Equity Securities for Which Transaction Reports Shall be Required by the Plan. Not applicable. B. Reporting Requirements Not applicable. C. Manner of Collecting, Processing, Sequencing, Making Available and Disseminating Last Sale Information Not applicable. D. Manner of Consolidation Not applicable. E. Standards and Methods Ensuring Promptness, Accuracy and Completeness of Transaction Reports Not applicable. F. Rules and Procedures Addressed to Fraudulent or Manipulative Dissemination Not applicable. G. Terms of Access to Transaction Reports The Network A Participants and the vendors that the proposed amendment would affect have already entered into the Network A Participants' standard form of agreement. No new terms of access will apply, other than the cap on the Broadcast Charge. H. Identification of Marketplace Execution Not applicable. III. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed Ninth Charges Amendment 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 *rule-comments@sec.gov* . Please include File Number SR-CTA-2007-01 on the subject line. Paper Comments • Send paper comments in triplicate to Nancy M. Morris, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090. All submissions should refer to File Number SR-CTA-2007-01. 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 Plan amendment that are filed with the Commission, and all written communications relating to the Plan amendment 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, 100 F Street, NE., Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. Copies of the Plan amendment also will be available for inspection and copying at the principal office of the CTA. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-CTA-2007-01 and should be submitted on or before August 22, 2007. 5 17 CFR 200.30-3(a)(27). For the Commission, by the Division of Market Regulation, pursuant to delegated authority. 5 Florence E. Harmon, Deputy Secretary. [FR Doc. E7-14839 Filed 7-31-07; 8:45 am] BILLING CODE 8010-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-56152; File No. PCAOB-2007-02] Public Company Accounting Oversight Board; Order Approving Proposed Auditing Standard No. 5, An Audit of Internal Control Over Financial Reporting That Is Integrated With an Audit of Financial Statements, a Related Independence Rule, and Conforming Amendments July 27, 2007. I. Introduction On May 25, 2007, the Public Company Accounting Oversight Board (the “Board” or the “PCAOB”) filed with the Securities and Exchange Commission (the “Commission”) Proposed Auditing Standard No. 5, *An Audit of Internal Control Over Financial Reporting that is Integrated with an Audit of Financial Statements* (“Auditing Standard No. 5”), a Related Independence Rule 3525, and Conforming Amendments, pursuant to Section 107 of the Sarbanes-Oxley Act of 2002 (the “Act”) and Section 19(b) of the Securities Exchange Act of 1934 (the “Exchange Act”). Auditing Standard No. 5 will supersede Auditing Standard No. 2, *An Audit of Internal Control Over Financial Reporting Performed in Conjunction with an Audit of Financial Statements* (“Auditing Standard No. 2”), to provide the professional standards and related performance guidance for independent auditors when an auditor is engaged to perform an audit of management's assessment of the effectiveness of internal control over financial reporting that is integrated with an audit of the financial statements pursuant to Sections 103(a)(2)(A)(iii) and 404(b) of the Act. Additionally, Rule 3525 further implements Section 202 of the Act's pre-approval requirement by requiring auditors to take certain steps as part of seeking audit committee pre-approval of internal control related non-audit services. Finally, the conforming amendments update the Board's other auditing standards in light of Auditing Standard No. 5, move certain information that was contained in Auditing Standard No. 2 to the Board's interim standards, and change the existing requirement that “generally, the date of completion of the field work should be used as the date of the independent auditor's report” to “the auditor should date the audit report no earlier than the date on which the auditor has obtained sufficient competent evidence to support the auditor's opinion.” Notice of the proposed standard, the related independence rule, and the conforming amendments was published in the **Federal Register** on June 12, 2007, 1 and a supplemental notice of additional solicitation of comments on the rules and amendments was published in the **Federal Register** on June 20, 2007 (“Supplemental Notice”). 2 The Commission received 37 comment letters on the proposed rules and amendments. For the reasons discussed below, the Commission is granting approval of the proposed standard, the related independence rule, and conforming amendments. 1 Release No. 34-55876 (June 7, 2007); 72 FR 32340 (June 12, 2007). 2 Release No. 34-55912 (June 15, 2007); 72 FR 34052 (June 20, 2007); Notice of Additional Solicitation of Comments on the Filing of Proposed Rule on Auditing Standard No. 5, An Audit of Internal Control Over Financial Reporting That is Integrated with an Audit of Financial Statements, and Related Independence Rule and Conforming Amendments. II. Description The Act establishes the PCAOB to oversee the audits of public companies and related matters, in order to protect the interests of investors and further the public interest in preparation of informative, accurate and independent audit reports. 3 Section 103(a) of the Act directs the PCAOB to establish auditing and related attestation standards, quality control standards, and ethics standards to be used by registered public accounting firms in the preparation and issuance of audit reports as required by the Act or the rules of the Commission. 3 Section 101(a) of the Act. Section 103(a)(2)(A)(iii) of the Act requires the Board's standard on auditing internal control to include “testing of the internal control structure and procedures of the issuer * * *.” Under Section 103, the Board's standard also must require the auditor to present in the audit report, among other things, “an evaluation of whether such internal control structure and procedures * * * provide reasonable assurance that transactions are recorded as necessary to permit the preparation of financial statements in accordance with generally accepted accounting principles * * *.” Section 404 of the Act requires that registered public accounting firms attest to and report on an assessment of internal control made by management and that such attestation “shall be made in accordance with standards for attestation engagements issued or adopted by the Board.” The Board's proposed Auditing Standard No. 5, which will supersede Auditing Standard No. 2, provides the new professional standards and related performance guidance for independent auditors to attest to, and report on, management's assessment of the effectiveness of internal control over financial reporting under Sections 103 and 404 of the Act. The auditor's report on internal control over financial reporting issued pursuant to Auditing Standard No. 5 will express one opinion—an opinion on whether the company has maintained effective internal control over financial reporting as of its fiscal year-end. In order for the auditor to render an opinion, Auditing Standard No. 5 requires the auditor to evaluate and test both the design and the operating effectiveness of internal control to be satisfied that management's assessment about whether the company maintained effective internal control over financial reporting as of its fiscal year-end is correct and, therefore, fairly stated. Additionally, paragraph 72 of Auditing Standard No. 5 requires the auditor to evaluate whether management has included in its annual assessment report all of the disclosures required by Commission rules. 4 If the auditor determines that management's assessment is not fairly stated, Auditing Standard No. 5 requires that the auditor modify his or her audit report on the effectiveness of internal control over financial reporting. 4 Item 308 of Regulations S-B and S-K. III. Discussion As discussed in detail below, the Commission believes there are many aspects of Auditing Standard No. 5 that are expected to result in improvements in both the effectiveness and efficiency of integrated audits that are currently being conducted in accordance with Auditing Standard No. 2. For example, Auditing Standard No. 5 focuses the audit on the matters most important to internal control. Auditing Standard No. 5 also eliminates unnecessary procedures by, among other things, removing the requirement to evaluate management's process; permitting consideration of knowledge obtained during previous audits; refocusing the multi-location testing requirements on risk rather than coverage; and removing unnecessary barriers to using the work of others. Further, Auditing Standard No. 5 encourages scaling of the audit for smaller companies by directing the auditor to tailor the audit to reflect the attributes of smaller, less complex companies. Lastly, Auditing Standard No. 5 simplifies the requirements by reducing detail and specificity; reflecting more accurately the sequential flow of an audit of internal control; and improving readability. The PCAOB received 175 comment letters when it published a draft of Auditing Standard No. 5 for public comment on December 19, 2006. On April 4, 2007, the Commission held an open meeting to discuss the comments received by the PCAOB and by the Commission in connection with its proposed interpretive guidance for management. At this meeting the Commission directed its staff to focus on four areas when working with the PCAOB staff: Aligning the proposed auditing standard with the Commission's proposed interpretive guidance for management, particularly with regard to prescriptive requirements, definitions and terms; scaling the audit to account for the particular facts and circumstances of all companies, particularly smaller companies; encouraging auditors to use professional judgment, particularly in using risk-assessment; and following a principles-based approach to determining when and to what extent the auditor can use the work of others. 5 5 See Commission Press Release dated April 4, 2007, “SEC Commissioners Endorse Improved Sarbanes-Oxley Implementation To Ease Smaller Company Burdens, Focusing Effort On What Truly Matters.” The PCAOB addressed these areas, in addition to other matters raised by commenters, in the version of Auditing Standard No. 5 that was filed with the Commission. For example, the PCAOB made revisions to its proposed standard to: Make the auditing standard more principles-based and reduce prescriptiveness; align definitions and terminology with the Commission's final interpretive guidance for management; better incorporate scaling concepts throughout the auditing standard; further emphasize fraud controls; enhance and align the discussion of entity-level controls; eliminate the requirement to separately assess risk at the individual control level; clarify the manner in which the evidence regarding design of controls can be obtained; and clarify the framework by which auditors can make judgments regarding whether and to what extent the auditor can use the work of others, including management. The Commission received 37 comment letters in response to its request for comments on Auditing Standard No. 5, the related independence rule, and conforming amendments. The comment letters came from issuers, 6 registered public accounting firms, 7 professional associations, 8 investors, 9 and others. 10 In general, many commenters expressed support for the proposed standard 11 and recommended that the Commission approve the standard and the related conforming amendments, with some of these commenters requesting that this approval be done on an expedited basis to enable auditors to implement the provisions of Auditing Standard No. 5 prior to the required effective date. 12 A number of the commenters noted that the new audit standard includes appropriate investor safeguards, will facilitate a more effective and efficient approach to the implementation, 13 and that the PCAOB appropriately responded to concerns raised by issuers, auditors, investors and others. 14 Specifically, some commenters noted that the standard's focus on principles rather than prescriptive requirements expands the opportunities for auditors to apply well-reasoned professional judgment. 15 Many of these commenters had provided similar communication directly to the PCAOB during its comment period, and to the Commission as part of its consideration of its proposed interpretive guidance for management. 6 Alamo Group; Pepsico; and XenoPort, Inc. 7 BDO Seidman, LLP; Deloitte & Touche LLP; Ernst & Young LLP; Grant Thornton LLP; KPMG LLP; and PricewaterhouseCoopers LLP. 8 American Bankers Association; American Bar Association Section of Business Law Committees on Federal Regulation of Securities and Law and Accounting; America's Community Bankers; Biotechnology Industry Organization; Center for Audit Quality; Independent Community of Bankers of America; Institute of Chartered Accountants in England and Wales; Institute of Internal Auditors (IIA); Institute of Management Accountants; Organization for International Investment; National Venture Capital Association; New York State Society of Certified Public Accountants; The Hundred Group of Finance Directors; and U.S. Chamber Center for Capital Markets Competitiveness. 9 California Public Employees Retirement System; Centre for Financial Market Integrity; and Council of Institutional Investors. 10 Accretive Solutions; Thomas E. Damman; David A. Doney; Benjamin P. Foster; Frank Gorrell; Simone Heidema and Erick Noorloos; J. Lavon Morton; Monica Radu; Robert Richter; R.G. Scott & Associates, LLC; and United States Government Accountability Office. 11 See for example, Accretive Solutions; America's Community Bankers; BDO Seidman, LLP; California Public Empolyees Retirement System; Center for Audit Quality; Council of Institutional Investors; Deloitte & Touche LLP; Ernst & Young LLP; Grant Thornton LLP; KPMG LLP; Institute of Chartered Accountants in England and Wales; New York State Society of Certified Public Accountants; PricewaterhouseCoopers LLP; The 100 Group of Finance Directors; and United States Government Accountability Office. 12 See for example, America's Community Bankers; BDO Seidman, LLP; California Public Employees Retirement System; Council of Institutional Investors; Deloitte & Touche LLP; Ernst & Young LLP; Grant Thornton LLP; KPMG LLP; and PricewaterhouseCoopers LLP. 13 See for example, American Bankers Association; Accretive Solutions; BDO Seidman, LLP; Center for Audit Quality; KPMG LLP; PricewaterhouseCoopers LLP; and The 100 Group of Finance Directors. 14 See for example, American Bankers Association; America's Community Bankers; Council of Institutional Investors; Ernst & Young LLP; Grant Thornton LLP; The 100 Group of Finance Directors; and United States Government Accountability Office. 15 See for example, BDO Seidman, LLP; Center for Audit Quality; Ernst & Young LLP; Institute of Chartered Accountants in England and Wales; PricewaterhouseCoopers LLP; and The 100 Group of Finance Directors. A few commenters expressed their continuing concerns that the Commission (in its recently approved rule amendments) and the PCAOB had retained the wrong auditor opinion, indicating their belief that auditors should opine on the assessment made by management in order to comply with Section 404(b) of the Sarbanes-Oxley Act. 16 These commenters expressed their belief that the auditor's opinion directly on internal control over financial reporting (as opposed to management's assessment) entails unnecessary and duplicative work. The Commission has carefully considered this comment and continues to believe that, consistent with Sections 103 and 404 of the Sarbanes-Oxley Act, the Commission's recent rule amendments and Auditing Standard No. 5 require the appropriate opinion to be expressed by the auditor. The Commission notes that this view is consistent with the view expressed by the Board in its release. Further, the Commission believes that an auditing process that is restricted to evaluating what management has done would not necessarily provide the auditor with a sufficient level of assurance to render an independent opinion as to whether management's assessment about the effectiveness of internal control over financial reporting is correct. 17 Finally, the Commission believes that the expression of a single opinion directly on the effectiveness of internal control over financial reporting provides clear communication to investors that the auditor is not responsible for issuing an opinion on management's process for evaluating internal control over financial reporting. 18 In the Commission's view, such an opinion may not only have the unintended consequence of hindering management's ability to apply appropriate judgment in designing their evaluation approach, but also may have the effect of increasing audit costs without commensurate benefit to issuers and investors. 16 See for example, Alamo Group; Robert Richter; Institute of Chartered Accountants in England and Wales; Institute of Management Accountants; and The 100 Group of Finance Directors. 17 See Release No. 33-8809 (June 20, 2007), Amendments to Rules Regarding Management's Report on Internal Control Over Financial Reporting. 18 Ibid. Two commenters noted their belief that there was not sufficient incentive for auditors to modify their methods of performing the audit of internal control and therefore, were concerned that the benefits afforded by Auditing Standard No. 5 would not be fully realized. These commenters noted that it was important for the PCAOB to adjust its inspection program to align it with the changes in the audit standard and to respect the auditors' use of judgment in conducting the audit. 19 Additionally, commenters noted that the PCAOB's inspection process should monitor the extent to which, and the expediency with which, audit firms implement Auditing Standard No. 5 in the manner expected. 20 This has been an area both the Commission and the PCAOB recognize and continue to focus on. For example, it was an area specifically identified in the Commission's and the PCAOB's 2006 announcement of actions following the Commission's second roundtable on Section 404 implementation. 21 The PCAOB has incorporated procedures to evaluate the efficiency and effectiveness of audits of internal control over financial reporting in their inspection process and, in April 2007, issued its second report on auditors' implementation of the internal control standard. 22 The Commission also recognizes this concern and, as a result and consistent with its previous 2006 announcement in this area, will be carefully monitoring the implementation, including directing the Commission staff to examine whether the PCAOB inspections of registered accounting firms have been effective in encouraging changes in the conduct of integrated audits to improve both efficiency and effectiveness of attestations on internal control over financial reporting. 19 America's Community Bankers and the Institute of Chartered Accountants in England and Wales. 20 See for example, America's Community Bankers, the Institute of Chartered Accountants in England and Wales, The 100 Group of Finance Directors and U.S. Chamber Center for Capital Markets Competitiveness. 21 See for example, SEC Press Release 2006-75 (May 16, 2006). 22 See PCAOB Press Release dated April 18, 2007, “Board Issues Second Year Report On Auditors' Implementation of Internal Control Standard”. The Commission received one comment with respect to the indicators of a material weakness that are included in Auditing Standard No. 5. Under Auditing Standard No. 5, if an auditor determines that a deficiency might prevent prudent officials from concluding that they have reasonable assurance that transactions are recorded as necessary to permit the preparation of financial statements in conformity with generally accepted accounting principles, an auditor should regard such a determination as an indicator of a material weakness. One commenter took exception to this requirement and requested that such a determination made by the auditor be regarded as an indicator of a deficiency that is at least a significant deficiency rather than an indicator of a material weakness; or that Auditing Standard No. 5 be revised to use the word “would” instead of “might” when describing the level of assurance that would satisfy prudent officials in the conduct of their own affairs. 23 The Commission notes that the commenter's suggestion to change the word “might” to “would” is not necessary or appropriate given that the PCAOB and the Commission both stated in their respective releases that the determination of whether or not a material weakness exists requires judgment and the presence of one or more indicators does not mandate a conclusion that a material weakness exists. Moreover, the Commission notes that the indicators are not intended to supplant or replace the definition of material weakness. This particular indicator is intended as a reminder of the requirement in Section 13(b)(2)(B) of the Exchange Act that every issuer “devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances” and of the explanation in Section 13(b)(7) of the Exchange Act that the term “reasonable assurances” in this context means “such level of detail and degree of assurance as would satisfy prudent officials in the conduct of their own affairs.” The Commission agrees with the list of indicators of a material weakness included in Auditing Standard No. 5, and agrees with the principles in Auditing Standard No. 5, which allow an auditor to use his or her judgment. 23 American Bar Association Section of Business Law Committees on Federal Regulation of Securities and Law and Accounting. The Commission received one comment with respect to the PCAOB's proposed Independence Rule 3525, which relates to the requirement for auditors to obtain audit committee pre-approval of non-audit services related to internal control over financial reporting. This commenter requested a transition provision in order to clarify that internal control-related services pre-approved by audit committees before the final rule is approved by the Commission do not require re-approval under Rule 3525. 24 Auditing Standard No. 2 (paragraph 33) required specific pre-approval of internal-control related non-audit services. The Commission notes that non-audit services that have already been pre-approved by audit committees would not require re-approval with the communications required by Rule 3525. Accordingly, a transition period is not necessary. 24 KPMG LLP. The Commission did not receive any comments with respect to the PCAOB's proposed conforming amendments. In some cases, these proposed amendments are administrative in nature, such as updating references in the interim standards to the proposed new standard's paragraph numbers and definitions. In other cases, the amendments have been proposed to move information currently contained in Auditing Standard No. 2 to the Board's existing standards. Further, the Commission notes that the Board addressed the single comment that it received on its conforming amendments. The Commission believes that the conforming amendments proposed by the Board are appropriate. As proposed by the PCAOB, Auditing Standard No. 5, PCAOB Rule 3525, and the Conforming Amendments will be effective and required for integrated audits conducted for fiscal years ending on or after Nov. 15, 2007. However, earlier adoption is permitted by the Board. The Board has stated that auditors who elect to comply with Auditing Standard No. 5 after Commission approval but before its effective date must also comply, at the same time, with Rule 3525 and other PCAOB standards as amended by this release. The Commission believes the effective date allows for appropriate transition time and at the same time encourages early adoption. In that regard, the Commission's recent amendments to Regulation S-X become effective on August 27, 2007 and the Commission will begin accepting the single auditor's attestation report on the effectiveness of internal control over financial reporting prescribed in Auditing Standard No. 5 in timely filings received starting on that date. In its Supplemental Notice, the Commission sought comments on seven specific questions. The following discussion addresses the comments received related to each of those questions. *(1) Is the standard of materiality appropriately defined throughout AS5 to provide sufficient guidance to auditors? For example, is materiality appropriately incorporated into the guidance regarding the matters to be considered in planning an audit and the identification of significant accounts?* The majority of the commenters who expressed a view on this question noted that Auditing Standard No. 5 appropriately addresses the concept of materiality when planning and performing an integrated audit. 25 Some commenters elaborated that while application of materiality concepts in the context of planning and performing an audit requires the use of judgment, Auditing Standard No. 5 specifies the basis on which those judgments should be made. 26 25 See for example, BDO Seidman, LLP; California Public Employees Retirement System; Center for Audit Quality; Deloitte & Touche LLP; Ernst & Young LLP; Grant Thornton LLP; Institute of Chartered Accountants in England and Wales; KPMG LLP; New York State Society of Certified Public Accountants; PepsiCo; PricewaterhouseCoopers LLP; and The Hundred Group of Finance Directors. 26 See for example, KPMG LLP and PricewaterhouseCoopers LLP. A few commenters expressed a view that some auditors may need further and clearer guidance than is provided. 27 However, one commenter indicated its view that the Commission should not provide more guidance and interpretation, especially as related to the application of quantitative criteria to the definitions of material weakness and significant deficiency. 28 Moreover, another commenter noted that although its view was that materiality was not sufficiently defined in Auditing Standard No. 5, it recognized that the definition of materiality extends to matters beyond just Section 404 of the Act. 29 27 See for example, Accretive Solutions; The Institute of Internal Auditors; Rod G. Scott; National Venture Capital Association; and U.S. Chamber Center for Capital Markets Competitiveness. 28 The Institute of Chartered Accountants in England and Wales. 29 National Venture Capital Association. The Commission agrees that Auditing Standard No. 5 adequately addresses materiality throughout the standard. For example, as a number of commenters observed, paragraph 20 of Auditing Standard No. 5 states that “in planning the audit of internal control over financial reporting, the auditor should use the same materiality considerations he or she would use in planning the audit of the company's financial statements.” Further, the Commission does not believe that the auditing standard is the appropriate forum to address broader questions about materiality, as the concept of materiality is fundamental to the federal securities laws. *(2) Please comment on the requirement in Paragraph 80 that the auditor consider whether there are any deficiencies or combinations of deficiencies that are significant deficiencies and, if so, communicate those to the audit committee. Specifically, will the communication requirement regarding significant deficiencies divert auditors' attention away from material weaknesses?* Commenters who expressed a view on this matter overwhelmingly observed that the auditor's requirement to communicate significant deficiencies would not divert auditors' attention away from material weaknesses since Auditing Standard No. 5 clearly directs the auditor to identify material weaknesses, with many of the commenters noting the importance of communicating significant deficiencies to the audit committee. 30 30 See for example, American Bar Association Section of Business Law Committees on Federal Regulation of Securities and Law and Accounting; Accretive Solutions; BDO Seidman, LLP; Center for Audit Quality; Centre for Financial Market Integrity; Council of Institutional Investors; Deloitte & Touche LLP; Ernst & Young LLP; Grant Thornton LLP; Institute of Chartered Accountants in England and Wales; KPMG LLP; J. Lavon Morton; New York State Society of Certified Public Accountants; PepsiCo; PricewaterhouseCoopers LLP; Rod G. Scott; and The 100 Group of Finance Directors, but see The Institute of Internal Auditors. The Commission agrees with commenters that the communication requirement related to significant deficiencies should not divert auditors' attention away from material weaknesses due to the clear statement in Auditing Standard No. 5 that in planning the audit, the auditor is not required to search for deficiencies that, individually, or in combination, are less severe than a material weakness. Further, the Commission agrees with the Board that limiting the discussion regarding significant deficiencies to the section of the auditing standard that relates to communications is appropriate in order to help clarify that the audit should not be scoped to identify deficiencies that are less severe than a material weakness. *(3) Is AS5 sufficiently clear that for purposes of evaluating identified deficiencies, multiple control deficiencies should only be looked at in combination if they are related to one another?* Most of those commenting on this question agreed that multiple control deficiencies should be aggregated for assessment purposes if they are related to each other and that Auditing Standard No. 5 is sufficiently clear in this regard. 31 Two commenters disagreed with the direction that multiple control deficiencies should only be evaluated in combination if they are related to one another given that the auditor is expressing an opinion on the effectiveness of internal control as a whole. 32 31 See for example, Accretive Solutions; BDO Seidman, LLP; Center for Audit Quality; Deloitte & Touche LLP; Ernst & Young LLP; Grant Thornton LLP, Institute of Chartered Accountants in England and Wales; PepsiCo; PricewaterhouseCoopers LLP; R.G. Scott; and The 100 Group of Finance Directors. 32 See California Public Employees' Retirement Systems; and United States Government Accountability Office. The Commission agrees with the view of most of the community that Auditing Standard No. 5 is sufficiently clear with respect to aggregation of control deficiencies and further notes that this guidance is appropriately aligned with the guidance that is contained in the Commission's interpretive guidance for management. *(4) Please comment on whether the definition of “material weakness” in Paragraph A7 (which is consistent with the definition that the SEC adopted) appropriately describes the deficiencies that should prevent the auditor from finding that ICFR is effective.* The majority of those commenting on this topic expressed agreement with Auditing Standard No. 5's definition of material weakness and stated that it appropriately describes those deficiencies that should prevent the auditor from concluding that internal control over financial reporting is effective, 33 while a couple commenters stated that the definition was not as clear as it could be, thereby potentially leading to subjective assessments of whether a control deficiency is a material weakness. 34 One commenter suggested providing guidance regarding the period of time to which reasonable possibility relates,[0] 35 and another suggested reconsideration of the likelihood threshold included in the definition. 36 Two commenters suggested that the requirement to evaluate deficiencies against interim results due to the reference to interim financial statements in the definition of material weakness should be eliminated, 37 with one of these two commenters stating that this consideration should not delay the Commission's prompt approval of Auditing Standard No. 5. 38 33 See for example, BDO Seidman, LLP; Center for Audit Quality; California Public Employees Retirement System; Council of Institutional Investors; Deloitte & Touche LLP; Ernst & Young LLP; Grant Thornton LLP; Institute of Chartered Accountants in England and Wales; New York State Society of Certified Public Accountants; PepsiCo; PricewaterhouseCoopers LLP; and The 100 Group of Finance Directors. 34 See for example, Accretive Solutions; R.G. Scott; and U.S. Chamber Center for Capital Markets Competitiveness. 35 See The Institute of Internal Auditors. 36 See National Venture Capital Association. 37 See National Venture Capital Association and PricewaterhouseCoopers LLP. 38 PricewaterhouseCoopers LLP. The Commission agrees that the definition of material weakness included in Auditing Standard No. 5, which is aligned with the Commission's interpretive guidance for management, appropriately describes the conditions that, if they exist, should be disclosed to investors and should preclude a conclusion that internal control over financial reporting is effective. Regarding the reference to interim financial statements in the definition of material weakness, the Commission continues to believe, as it stated in its release adopting the definition of a material weakness, that: “* * *[while] annual materiality considerations are appropriate when making judgments about the nature and extent of evaluation procedures, the Commission believes that judgments about whether a control is adequately designed or operating effectively should consider the requirement to provide investors reliable interim and annual financial reports. Further, if a deficiency is identified that poses a reasonable possibility of a material misstatement in the company's quarterly reports, the Commission believes that the deficiency should be disclosed to investors and internal control over financial reporting should not be assessed as effective.” 39 39 See Release No. 33-8809 (June 20, 2007), Amendments to Rules Regarding Management's Report on Internal Control Over Financial Reporting. *(5) Is AS5 sufficiently clear about the extent to which auditors can use the work of others?* The majority of those who commented on this question expressed their view that Auditing Standard No. 5 is clear about the extent to which auditors can use the work of others to gain efficiencies in the audit, 40 with some noting that Auditing Standard No. 5 provides substantial flexibility in the application of auditor judgment when determining whether, and to what extent, to use the work of others. 41 A small number of commenters noted that further clarification regarding the extent that auditors can rely on the work of others when conducting walkthroughs would be helpful. 42 Two commenters recommended that if the work of others is found to be competent and reliable, then the standard should require the auditor to utilize it. 43 40 See for example, Accretive Solutions; BDO Seidman, LLP; Center for Audit Quality; Council of Institutional Investors; Deloitte & Touche LLP; Ernst & Young LLP; Grant Thornton LLP; KPMG LLP; PepsiCo; and PricewaterhouseCoopers LLP. 41 See for example, Deloitte & Touche LLP; KPMG LLP; and PricewaterhouseCoopers LLP. 42 See for example, The 100 Group of Finance Directors; and J. Lavon Morton. 43 See American Bankers Association and Biotechnology Industry Organization. The Commission agrees that Auditing Standard No. 5 is sufficiently clear about the extent to which the auditor can use the work of others. Further, while the Commission would anticipate auditors would use the work of others under appropriate circumstances, including when the approach results in greater efficiency, the Commission does not believe it is necessary or appropriate to preclude the auditor from utilizing his or her judgment in determining whether or not to use the work of others based on the particular facts and circumstances of the engagement. *(6) Will AS5 reduce expected audit costs under Section 404, particularly for smaller public companies, to result in cost-effective, integrated audits?* A number of commenters stated their view that Auditing Standard No. 5, as approved by the PCAOB, together with the Commission's guidance for management on assessing internal control over financial reporting, will result in a reduction of the total Section 404 compliance effort. 44 Some commenters agreed that a cost reduction would occur, but also noted that the amount of reduced effort and cost associated with the audit of internal control over financial reporting will vary by company depending on factors such as size, complexity, the degree of change from year-to-year, the quality of internal control systems and documentation, and the extent to which management appropriately applies the Commission's interpretive guidance for management. 45 None of the commenters suggested that costs would increase. 44 See for example, BDO Seidman, LLP; Center for Audit Quality; Council of Institutional Investors; Deloitte & Touche LLP; Ernst & Young LLP; KPMG LLP; New York State Society of Certified Public Accountants; PricewaterhouseCoopers LLP; The 100 Group of Finance Directors; and The Institute of Internal Auditors. 45 See for example, Accretive Solutions; BDO Seidman, LLP; Center for Audit Quality; Deloitte & Touche LLP; Ernst & Young LLP; Grant Thornton LLP; and PricewaterhouseCoopers LLP. Some of the features of Auditing Standard No. 5 that the Commission expects will result in improved effectiveness and efficiency include the direction provided to auditors to focus on what matters most, the elimination of unnecessary procedures from the audit, the ability to scale the audit to fit the size and complexity of the company, the alignment with the Commission's interpretive guidance for management, and its less prescriptive nature. Consequently, the Commission believes that Section 404 compliance costs, for both management's evaluation as well as the external audit, will decrease as a result of the Commission's efforts and Auditing Standard No. 5. Some commenters noted that while Auditing Standard No. 5 may curtail excessive testing of controls and reduce some of the unnecessary documentation currently required for Section 404 audits, they still have concerns about the extent to which it will reduce costs for smaller public companies. 46 A number of commenters urged the Commission and PCAOB to monitor closely the extent to which the standard as implemented achieves a reduction in cost, and to take action if there is not an appropriate reduction. 47 46 See for example, America's Community Bankers; David A. Doney; Independent Community Bankers of America; National Venture Capital Association; J Lavon Morton; R.G. Scott; XenoPort, Inc.; and U.S. Chamber Center for Capital Markets Competitiveness. 47 See for example, American Bankers Association; America's Community Bankers; Biotechnology Industry Organization; Independent Community Bankers of America; Institute of Chartered Accountants in England and Wales; Institute of Management Accountants; The 100 Group of Finance Directors; and U.S. Chamber Center for Capital Markets Competitiveness. In response to continued concerns about the extent of cost reductions, the Commission's staff is planning to analyze and report on the costs associated with the implementation of the Commission's interpretive guidance for management as well as the implementation of Auditing Standard No. 5. The staff will make any recommendations it believes appropriate to the Commission. *(7) Does AS5 inappropriately discourage or restrict auditors from scaling audits, particularly for smaller public companies?* With regards to scalability, most commenters who responded to this question noted that Auditing Standard No. 5 appropriately discusses the concepts of scalability based on size and complexity without including inappropriate restrictions on the auditor's ability to scale the audit. 48 Other commenters observed that where feasible, Auditing Standard No. 5 should also provide additional guidance on how to effectively plan an integrated audit for smaller public companies and a discussion of related best practices to enhance a broader understanding of risk-based auditing. 49 One commenter expressed concern that an objective definition of “smaller company” is necessary in order to provide meaningful direction in scaling the audit and that the standard should clarify that both smaller and less complex companies would be subject to scaled audits. 50 48 See for example, BDO Seidman, LLP; Center for Audit Quality; Council of Institutional Investors; Deloitte & Touche LLP; Ernst & Young LLP; Grant Thornton LLP; PepsiCo; PricewaterhouseCoopers LLP; and The Institute of Internal Auditors. 49 See for example, New York State Society of Certified Public Accountants. 50 Biotechnology Industry Organization. The Commission believes that Auditing Standard No. 5 appropriately discusses the concepts of scalability without including inappropriate restrictions on the auditor's ability to scale the audit. Further the Commission agrees with the guidance in Auditing Standard No. 5 that provides for scaling and tailoring of all audits to fit the relevant facts and circumstances. The Commission also agrees with the statement made by the Board in its release to Auditing Standard No. 5 that “scaling will be most effective if it is a natural extension of the risk-based approach and applicable to all companies.” 51 As a result, Auditing Standard No. 5 contains not only a separate section on scaling the audit, but it also contains specific discussion of scaling concepts throughout the standard. The Commission believes that these concepts will enable tailoring of internal control audits to fit the size and complexity of the company being audited rather than the company's control system being made to fit the auditing standard. Additionally, as some commenters observed, the PCAOB's project to develop guidance and education for auditors of smaller public companies, along with the Committee of Sponsoring Organizations of the Treadway Commission's (“COSO”) project to develop guidance designed to help organizations monitor the quality of their internal control systems and other COSO guidance directed to smaller public companies, should also facilitate the implementation of Section 404 in an effective and efficient manner. 52 51 See PCAOB Release No. 2007-005 (May 24, 2006). 52 See for example, Center for Audit Quality, Deloitte & Touche LLP; and PricewaterhouseCoopers LLP. In summary, the Commission believes that Auditing Standard No. 5, the related independence rule, and the conforming amendments will enable better integrated, more effective, and more efficient audits while satisfying the requirements set forth in Sections 103 and 404 of the Act. Further, the Commission notes that Auditing Standard No. 5 is appropriately aligned with the Commission's own rules and interpretive guidance for management. IV. Conclusion On the basis of the foregoing, the Commission finds that proposed Auditing Standard No. 5, the related independence rule, and the conforming amendments are consistent with the requirements of the Act and the securities laws and are necessary and appropriate in the public interest and for the protection of investors. *It is therefore ordered,* pursuant to Section 107 of the Act and Section 19(b)(2) of the Exchange Act, that proposed Auditing Standard No. 5, *An Audit of Internal Control Over Financial Reporting that is Integrated with an Audit of Financial Statements,* the Related Independence Rule, and Conforming Amendments (File No. PCAOB-2007-02) be and hereby are approved. By the Commission. Nancy M. Morris, Secretary. [FR Doc. E7-14858 Filed 7-31-07; 8:45 am] BILLING CODE 8010-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-56148; File No. 4-544] Program for Allocation of Regulatory Responsibilities Pursuant to Rule 17d-2; Notice of Filing and Order Approving and Declaring Effective a Plan for the Allocation of Regulatory Responsibilities Between the National Association of Securities Dealers, Inc., New York Stock Exchange, LLC, and NYSE Regulation, Inc. July 26, 2007. Notice is hereby given that the Securities and Exchange Commission (“SEC” or “Commission”) has issued an Order, pursuant to Sections 17(d) and 11A(a)(3)(B) 1 of the Securities Exchange Act of 1934 (“Act”), approving and declaring effective a plan for the allocation of regulatory responsibilities (“17d-2 Plan” or “Plan”) that was filed pursuant to Rule 17d-2 under the Act, 2 by the National Association of Securities Dealers, Inc. (“NASD”), the New York Stock Exchange LLC (“NYSE”), and NYSE Regulation, Inc. (“NYSE Regulation”) (collectively, the “Parties”). 1 15 U.S.C. 78q(d) and 15 U.S.C. 78k-1(a)(3)(B), respectively. 2 17 CFR 240.17d-2. I. Introduction Section 19(g)(1) of the Act, 3 among other things, requires every self-regulatory organization (“SRO”) registered as either a national securities exchange or registered securities association to examine for, and enforce compliance by, its members and persons associated with its members with the Act, the rules and regulations thereunder, and the SRO's own rules, unless the SRO is relieved of this responsibility pursuant to Section 17(d) 4 or 19(g)(2) 5 of the Act. Without this relief, the statutory obligation of each individual SRO could result in a pattern of multiple examinations of broker-dealers that maintain memberships in more than one SRO (“common members”). Such regulatory duplication would add unnecessary expenses for common members and their SROs. 3 15 U.S.C. 78s(g)(1). 4 15 U.S.C. 78q(d). 5 15 U.S.C. 78s(g)(2). Section 17(d)(1) of the Act 6 was intended, in part, to eliminate unnecessary multiple examinations and regulatory duplication. 7 With respect to a common member, Section 17(d)(1) authorizes the Commission, by rule or order, to relieve an SRO of the responsibility to receive regulatory reports, to examine for and enforce compliance with applicable statutes, rules, and regulations, or to perform other specified regulatory functions. 6 15 U.S.C. 78q(d)(1). 7 *See* Securities Act Amendments of 1975, Report of the Senate Committee on Banking, Housing, and Urban Affairs to Accompany S. 249, S. Rep. No. 94-75, 94th Cong., 1st Session 32 (1975). To implement Section 17(d)(1), the Commission adopted two rules: Rule 17d-1 and Rule 17d-2 under the Act. 8 Rule 17d-1 authorizes the Commission to name a single SRO as the designated examining authority (“DEA”) to examine common members for compliance with the financial responsibility requirements imposed by the Act, or by Commission or SRO rules. 9 When an SRO has been named as a common member's DEA, all other SROs to which the common member belongs are relieved of the responsibility to examine the firm for compliance with the applicable financial responsibility rules. On its face, Rule 17d-1 deals only with an SRO's obligations to enforce member compliance with financial responsibility requirements. Rule 17d-1 does not relieve an SRO from its obligation to examine a common member for compliance with its own rules and provisions of the federal securities laws governing matters other than financial responsibility, including sales practices and trading activities and practices. 8 17 CFR 240.17d-1 and 17 CFR 240.17d-2, respectively. 9 *See* Securities Exchange Act Release No. 12352 (April 20, 1976), 41 FR 18808 (May 7, 1976) (adopting Rule 17d-1). To address regulatory duplication in these and other areas, the Commission adopted Rule 17d-2 under the Act. 10 Rule 17d-2 permits SROs to propose joint plans for the allocation of regulatory responsibilities with respect to their common members. Under paragraph

(c)of Rule 17d-2, the Commission may declare such a plan effective if it determines that the plan is necessary or appropriate in the public interest and for the protection of investors, fosters cooperation and coordination among the SROs, removes impediments to, and fosters the development of, a national market system and a national clearance and settlement system, and is in conformity with the factors set forth in Section 17(d) of the Act. Commission approval of a plan filed pursuant to Rule 17d-2 relieves an SRO of those regulatory responsibilities allocated by the plan to another SRO. 10 *See* Securities Exchange Act Release No. 12935 (October 28, 1976), 41 FR 49091 (November 8, 1976) (adopting Rule 17d-2). II. The Proposed Plan A. The Transaction In November 2006, NASD and NYSE Group, Inc. (“NYSE Group”) 11 announced their plan to consolidate their member regulation operations into a single organization that would provide member firm regulation for securities firms that conduct business with the public in the United States (the “Transaction”). 12 Pursuant to the Transaction, the member firm regulation and enforcement functions and employees from NYSE Regulation would be transferred to NASD, 13 and the expanded NASD would adopt a new corporate name—the Financial Industry Regulatory Authority (“FINRA”). 14 The consolidation is intended to streamline the broker-dealer regulatory system, combine technologies, and permit the establishment of a single set of rules and a single set of examiners with complementary areas of expertise within a single SRO. 15 11 NYSE Group recently combined with Euronext N.V. (“Euronext”) to form a single, publicly traded holding company named NYSE Euronext. NYSE Group and Euronext became separate subsidiaries of NYSE Euronext. The corporate structure for the businesses of NYSE Group (including the businesses of the NYSE LLC and NYSE Arca, Inc., a registered national securities exchange) remained unchanged following the combination. Specifically, NYSE LLC remains a wholly-owned subsidiary of NYSE Group. NYSE Market remains a wholly-owned subsidiary of the NYSE LLC and conducts NYSE LLC's business. NYSE Regulation remains a wholly-owned subsidiary of NYSE LLC and performs the regulatory responsibilities for NYSE LLC pursuant to a delegation agreement with NYSE LLC and many of the regulatory functions of NYSE Arca pursuant to a services agreement with NYSE Arca. *See* Securities Exchange Act Release No. 55293 (February 14, 2007), 72 FR 8033 (February 22, 2007) (SR-NYSE-2006-120). 12 Currently, both NASD and NYSE Regulation oversee the activities of U.S.-based broker-dealers doing business with the public, approximately 170 of which are members of both organizations. 13 Following the closing of the Transaction, NYSE Regulation will continue to oversee market surveillance and listed company compliance at the NYSE and NYSE Arca. 14 The closing of the Transaction and the consolidation of the member firm regulatory functions of the NASD and NYSE Regulation are subject to the execution of definitive agreements between NASD and NYSE Group, the Commission's approval of certain proposed rule changes, and certain other additional regulatory approvals. 15 *See* Securities Exchange Act Release No. 55495 (March 20, 2007), 72 FR 14149 (March 26, 2007) (SR-NASD-2007-023) (proposing to amend the By-Laws of NASD to implement governance and related changes to accommodate the consolidation of the member firm regulatory functions of NASD and NYSE Regulation) (“By-Law Amendments Filing”). To effectuate the consolidation, NASD has submitted a proposed rule change to incorporate into FINRA's rulebook certain existing NYSE rules that pertain to the regulation of member firm conduct (the “Incorporated NYSE Rules”). 16 The Incorporated NYSE Rules will apply to members of FINRA that are also members of NYSE on or after the date of the closing of the Transaction (such common members are referred to as “Dual Members”). 17 Consequently, to relieve NYSE of its responsibility to examine for, and enforce compliance with, the applicable NYSE rules, the Parties have entered into a joint plan for the allocation of regulatory responsibilities with respect to Dual Members, as discussed below. 16 *See* File No. SR-NASD-2007-054 (“Incorporation Filing”). The list of Incorporated NYSE Rules is set forth in Exhibit 5 of SR-NASD-2007-054. 17 *See id.* *See also* Proposed 17d-2 Plan (defining Dual Members as broker-dealer firms that are members of both the NYSE and FINRA on or after the closing date of the Transaction). Subsequent to the closing of the Transaction, FINRA intends to begin the process of consolidating its rule set applicable to member firms by reducing to one the two sets of rules ( *i.e.* , NASD rules and the Incorporated NYSE Rules) that are currently applicable to Dual Members. 18 18 FINRA's efforts to reduce regulatory duplication in this regard with respect to Dual Members by consolidating the two separate rule sets will constitute a proposed rule change and will be subject to Commission approval. B. The Proposed Plan On July 26, 2007, the Parties submitted the proposed 17d-2 Plan in connection with the proposed consolidation of the member regulation operations of NASD and NYSE Group. The Plan would reduce regulatory duplication for firms that are Dual Members by allocating certain regulatory responsibilities for selected NYSE rules from NYSE Regulation to FINRA. 19 Specifically, the Plan includes a list of all of those rules (the “Common Rules,” which are listed on the “List of Common Rules” attached as Exhibit 1 to the Plan) for which FINRA would assume examination, enforcement, and surveillance responsibilities under the Plan relating to compliance by Dual Members to the extent that such responsibilities involve member firm regulation. 20 The NYSE rules on the List of Common Rules are the same rules that are proposed by NASD to be incorporated into the FINRA rulebook, so that such rules will be common rules of both FINRA and NYSE for purposes of the 17d-2 Plan. 21 19 *See* Incorporation Filing, *supra* note 16; *see also* paragraph 2(a) of the proposed 17d-2 Plan. 20 *See* Paragraph 1(a) of the proposed 17d-2 Plan. 21 *See* Paragraph 2(a) of the proposed 17d-Plan. Under the Plan, NYSE would retain full responsibility for:

(i)Examinations of Dual Member conduct covered by NYSE rules that are not Common Rules (“NYSE-only Rules”) and/or by federal laws or regulations;

(ii)surveillance, investigation, and enforcement with respect to conduct relating to trading on or through the systems and facilities of NYSE and conduct otherwise covered by NYSE-only Rules, as well as surveillance, investigation, and enforcement with respect to whether such conduct may constitute a violation of federal laws or regulations;

(iii)processing of applications for trading licenses or other indicia of membership in NYSE;

(iv)qualification and registration of firm personnel to effect transactions or work on the floor of NYSE pursuant to NYSE's applicable qualification and registration rules; and

(v)the application of any Common Rule as it pertains to matters other than member firm regulation, including matters relating to the NYSE's exclusive responsibility for the aforementioned areas (the “Non-Exclusive Common Rules”). 22 22 *See* Paragraphs 2(d)(i)-(v) of the proposed 17d-2 Plan; *see also infra* text accompanying notes 29-30 (discussing the Non-Exclusive Common Rules). The text of the proposed 17d-2 Plan and the Exhibits thereto are as follows: Agreement Between National Association of Securities Dealers, Inc., New York Stock Exchange, LLC., and NYSE Regulation, Inc. Pursuant to SEC Rule 17d-2 Promulgated by the Securities and Exchange Commission Under the Securities Exchange Act of 1934 This Agreement, between and among National Association of Securities Dealers, Inc., a Delaware nonstock membership corporation (“NASD”), New York Stock Exchange, LLC., a New York limited liability company (the “NYSE”), and NYSE Regulation, Inc., a New York not-for-profit corporation and an indirectly wholly-owned subsidiary of NYSE Group, Inc. (“NYSE Regulation”), is made this 26th day of July, 2007, pursuant to the provisions of Rule 17d-2 promulgated by the Securities and Exchange Commission (the “Commission”) under the Securities Exchange Act of 1934, as amended (the “Act”), which authorizes agreements between self-regulatory organizations for plans to reduce or eliminate regulatory duplication. Whereas, NYSE Group, Inc., a Delaware corporation and direct wholly-owned subsidiary of NYSE Euronext (“NYSE Group”), NYSE Regulation and NASD intend to enter into an Asset Purchase Agreement (the “Purchase Agreement”), pursuant to which

(i)NYSE Regulation will agree to transfer to NASD and NASD will agree to assume from NYSE Regulation, approximately 470 employees and related expenses and revenues from the following functions or groups of NYSE Regulation:

(1)Member firm regulation (including testing, continuing education and registration);

(2)risk assessment;

(3)arbitration; and

(4)enforcement (except for the portion thereof that handles cases related to market surveillance and NYSE-only Rules (as defined herein) and/or related federal laws or regulations), and

(ii)NASD will operate under a new name, Financial Industry Regulatory Authority, Inc. (“FINRA”); and Whereas, in connection with the transactions contemplated by the Purchase Agreement (collectively, the “Transaction”), the parties seek to reduce duplication in the regulation of broker-dealer firms that are members of both the NYSE and FINRA on or after the Effective Date, as defined herein, (“Dual Members”) and in the filing and processing of certain registration and membership records; and Whereas, the parties intend that FINRA will perform various functions formerly performed by NYSE Regulation; and Whereas, FINRA will perform certain of these functions pursuant to a Regulatory Services Agreement to be entered into between and among the parties, and will perform certain of these functions pursuant to this Agreement among the parties in conformity with the requirements of Section 17(d) of the Act and Rule 17d-2 promulgated thereunder; and Whereas, the parties intend this Agreement to describe the functions to be performed by FINRA pursuant to Section 17(d) of the Act and Rule 17d-2 promulgated thereunder, and intend to file such with the Commission for its approval. Now, Therefore, in consideration of the foregoing, the mutual covenants contained hereinafter, and other good and valuable consideration, the parties hereby agree as follows: 1. *Assumption of Regulatory Responsibilities.*

(a)On the Effective Date, which shall be the closing date of the Transaction, provided that the Commission has approved this Agreement as of such closing date, FINRA will assume regulatory responsibilities for all Dual Members for the list of rules attached as Exhibit 1 (“Common Rules”) to this Agreement and made part hereof including examination, enforcement and surveillance responsibilities for such Common Rules to the extent that such responsibilities involve member firm regulation (the “Regulatory Responsibilities”). This Agreement shall not become effective if the Transaction does not close.

(b)FINRA shall not charge NYSE for performing the Regulatory Responsibilities except for the reasonable notification expenses and travel and out-of-pocket expenses as provided in paragraphs 4(c) and 5. 2. *Scope of Regulatory Responsibilities.*

(a)Prior to the Effective Date, NASD shall submit a filing to the Commission adopting, as of the Effective Date, those NYSE rules listed in *Exhibit 1* by incorporating into the FINRA rulebook in their entirety such NYSE rules in effect as of the Effective Date so that as of the Effective Date, the rules shall be Common Rules of both FINRA and the NYSE for purposes of this Agreement, Section 17(d) of the Act and Rule 17d-2 promulgated thereunder.

(b)Whenever either NYSE or FINRA proposes to make a change to the substance of any of the Common Rules, before filing such proposal with the SEC, it shall inform the other party to determine whether the other party will agree to promptly propose a conforming change to its version of the Common Rule. In the event the parties do not agree to propose conforming changes, the parties agree that they will file with the SEC for approval an amendment to this Agreement deleting such rule from the list of Common Rules, such amendment to be effective no earlier than the date of SEC approval of the change to the Common Rule proposed by the NYSE or FINRA, as the case may be.

(c)*Common Rulebook.* FINRA intends to create a single set of Rules to replace the FINRA NASD Rules and the NYSE Rules incorporated by FINRA. There is a substantial likelihood that each FINRA rule that would replace an as then-existing NYSE Rule incorporated by FINRA and applicable to Dual Members will be substantially different from the then-existing NYSE Rule. In such case, pursuant to paragraph 2(b) above, NYSE would need to seek and obtain approval from the Commission to amend its corresponding Rule to conform to the new FINRA Rule.

(d)Notwithstanding anything contained in this Agreement to the contrary, NYSE shall retain regulatory responsibility for the following (collectively, the “Retained Responsibilities”):

(i)Examinations of conduct or action by a Dual Member that is otherwise covered by NYSE rules that are not Common Rules (the “NYSE-only Rules”) and/or by related federal laws or regulations;

(ii)Surveillance of, and investigation and enforcement with respect to, conduct or action undertaken in connection with trading on or through the systems and facilities of the NYSE, or conduct or actions by a Dual Member that are otherwise covered by NYSE-only Rules, additionally, in all such cases, surveillance, investigation and enforcement with respect to how such conduct may constitute a violation of applicable federal laws or regulations;

(iii)Processing of applications for trading licenses or other indicia of membership in the NYSE, including without limitation applying NYSE's rules relating to the rights and obligations of Dual Members that hold a trading license to effect transactions on the floor of the NYSE or through any systems or facilities of the NYSE;

(iv)Qualification and registration of member firm personnel to effect transactions or work as Floor employees on the Floor of the NYSE, pursuant to the NYSE's applicable rules regarding qualifications and registration; and

(v)The application of any Common Rule as it pertains to matters other than member firm regulation, including matters relating to NYSE's exclusive responsibility for (i)-(iv) above (the “Non-Exclusive Common Rules”). The parties have identified the Non-Exclusive Common Rules, which are specifically designated on *Exhibit 1,* as those rules for which both NYSE and FINRA will bear responsibility when performing their respective regulatory responsibilities. 3. *Violations.*

(a)Should FINRA become aware of potential violations of the NYSE-only Rules, discovered pursuant to the performance of the Regulatory Responsibilities assumed hereunder, FINRA will promptly notify the NYSE of those potential violations, and such matters will be handled by NYSE.

(b)Should NYSE become aware of potential violations of Common Rules, discovered pursuant to the performance of the Retained Responsibilities, NYSE will promptly notify FINRA of those potential violations, and such matters will be handled by FINRA as provided in this Agreement. 4. *Applications for, Qualification for, and Termination of, Membership.* (a)(i) Dual Members subject to this Agreement will be required to submit to FINRA, and FINRA will be responsible for processing, and acting upon, all applications (each an “Application”) submitted on behalf of the Dual Member and any individual associated with such Dual Member required to be approved by the rules of NYSE and FINRA (collectively, an “Applicant”).

(ii)Promptly upon receipt of any complete Application, but in any event no later than seven

(7)business days thereafter, FINRA shall advise NYSE of the qualifications and registration status of the Applicant required to be approved pursuant to the rules of NYSE and FINRA. The NYSE reserves the right to require additional qualifications or registrations prior to approving an Applicant as a member of the NYSE, pursuant to the process described in NYSE rules.

(b)FINRA shall promptly advise NYSE of information regarding changes in status of any person required to be approved pursuant to the rules of NYSE and FINRA that relates to a statutory disqualification, involuntary termination from employment or any other submission made to FINRA pursuant to NYSE Rule 351(a)-(c). The NYSE reserves the right to disqualify a member pursuant to the process described in NYSE rules.

(c)Dual Members will be required to send to FINRA all letters, termination notices or other material respecting persons required to be approved pursuant to the rules of NYSE and FINRA. When as a result of processing said submissions FINRA becomes aware of a statutory disqualification as defined in the Act with respect to a Dual Member or person associated with a Dual Member, FINRA will determine pursuant to Section 15A(g) or 6(c) of the Act the acceptability or continued acceptability of the person to whom such disqualification applies but will not make a determination regarding NYSE membership or participation, or association of a person with an NYSE member. FINRA shall advise NYSE in writing of its actions in this regard. NYSE shall, within 30 days of receiving such information from FINRA, determine whether to permit a Dual Member that has been determined to be statutorily disqualified by FINRA from becoming or remaining an NYSE member or a participant, or a person associated with a member. NYSE will advise FINRA of its decision. NYSE will reimburse FINRA for reasonable expenses incurred in notifying NYSE of FINRA's decision regarding a statutory disqualification under Section 15A(g) or Section 6(c) of the Act. FINRA will also be responsible for processing and, if required, acting upon all requests for the opening, address changes, and terminations of branch offices by Dual Members and any other applications required of Dual Members under the Common Rules. 5. *Information Sharing.* The parties agree to share information as follows:

(a)General.

(i)FINRA shall promptly furnish to the NYSE any information that FINRA determines indicates possible financial or operational problems that may affect the continued ability of any Dual Member to conduct business.

(ii)NYSE shall promptly furnish to FINRA any information that the NYSE determines indicates possible financial or operational problems that may affect the continued ability of any Dual Member to conduct business.

(b)Reports and Other Documents.

(i)FINRA shall upon request promptly make available to the NYSE at no cost any existing financial, operational, or related report filed with FINRA by a Dual Member, as well as any existing files, information on customer complaints, termination notices, copies of an examination report, examination workpapers, investigative material, enforcement referrals or other documents involving compliance with the federal securities laws and regulations and the rules of the parties by the Dual Member, or other documents in the possession of FINRA relating to the Dual Member as necessary to assist the NYSE in fulfilling the Retained Responsibilities.

(ii)NYSE shall upon request promptly make available to FINRA at no cost any existing files, information on customer complaints, termination notices, copies of an examination report, examination workpapers, investigative material, enforcement referrals or other documents involving compliance with the federal securities laws and regulations and the rules of the parties by the Dual Member, or other documents in the possession of NYSE relating to the Dual Member as necessary to assist FINRA in fulfilling the self-regulatory responsibilities, obligations, and functions allocated to it under this Agreement.

(c)Third-party Complaints.

(i)If FINRA receives a copy of a complaint from any third-party or any report from a Dual Member pursuant to NYSE Rule 351, as incorporated by FINRA, relating to possible violations by a Dual Member or persons associated with a Dual Member that is not within the Regulatory Responsibilities of FINRA and is within the Retained Responsibilities of the NYSE, FINRA shall promptly forward to the NYSE copies of such complaints, and NYSE shall have responsibility to review and take any appropriate action with respect to such complaint.

(ii)If NYSE receives a copy of a complaint from any third-party relating to a Dual Member's activity or conduct that is within the Regulatory Responsibilities of FINRA or is otherwise within the scope of FINRA's regulatory jurisdiction, the NYSE shall promptly forward to FINRA copies of such complaints, and FINRA shall have responsibility to review and take any appropriate action with respect to such complaint.

(d)Information on Formal and Informal Discipline.

(i)FINRA shall promptly make available to the NYSE information on

(1)Formal disciplinary actions taken by FINRA involving a Dual Member or persons associated with a Dual Member; and

(2)informal disciplinary actions taken by FINRA involving a Dual Member and such individuals identified to FINRA by NYSE that are employed by a Dual Member and who have been designated to effect transactions on the Floor of the NYSE or to work as Floor employees on the Floor of the NYSE, or to supervise such employees. For purposes of this paragraph (d)(i), informal disciplinary actions shall mean Letters of Caution.

(ii)The NYSE shall promptly make available to FINRA information on

(1)formal disciplinary actions taken by NYSE involving a Dual Member or persons associated with a Dual Member; and

(2)informal disciplinary actions taken by NYSE involving a Dual Member. For purposes of this paragraph (d)(ii), informal disciplinary actions shall mean Letters of Education, Letters of Admonition, and Summary Fines.

(e)Parties to Make Personnel Available as Witnesses.

(i)FINRA shall make its personnel available to the NYSE to serve as testimonial or non-testimonial witnesses as necessary to assist the NYSE in fulfilling the self-regulatory responsibilities retained by it under this Agreement. NYSE shall pay all reasonable travel and other out-of-pocket expenses incurred by FINRA's employees to the extent that the NYSE requires such employees to serve as a witness, and provide information or other assistance pursuant to this Agreement.

(ii)The NYSE shall make its personnel available to FINRA to serve as testimonial or non-testimonial witnesses as necessary to assist FINRA in fulfilling the Regulatory Responsibilities. FINRA shall pay all reasonable travel and other out-of-pocket expenses incurred by NYSE's employees to the extent that FINRA requires such employees to serve as a witness, and provide information or other assistance pursuant to this Agreement.

(f)*Confidentiality.* The parties agree that documents or information shared shall be held in confidence, and used only for the purposes of carrying out their respective regulatory obligations. Neither party shall assert regulatory or other privileges as against the other with respect to documents or information that is required to be shared pursuant to this Agreement.

(g)*No Waiver of Privilege.* The sharing of documents or information between the parties pursuant to this Agreement shall not be deemed a waiver as against third parties of regulatory or other privileges relating to the discovery of documents or information.

(h)*Periodic Meetings.* The parties agree that they shall conduct regular joint meetings between them for the purposes of reporting on the conduct of the Regulatory Responsibilities and current investigations involving significant rule violations by a Dual Member, and identifying issues or concerns with respect to the regulation of Dual Members. 6. *Arbitration of Disputes Under This Agreement.*

(a)*Regulatory Services Manager.* NYSE and NASD hereby each appoint the employee identified on *Exhibit 2* hereto as its respective Regulatory Services Manager (the “Regulatory Services Manager”) to, among other things, resolve disputes pursuant to Section 6(b) of this Agreement and oversee day-to-day management of the services and activities contemplated by this Agreement. On reasonable prior written notice to the other, NYSE and FINRA shall each have the right to replace its respective Regulatory Services Manager with an employee or officer with comparable knowledge, expertise and decision-making authority.

(b)*Dispute Resolution.* Except as otherwise expressly set forth in this Agreement, any dispute arising out of or relating to this Agreement shall be submitted for resolution to the Regulatory Services Managers. In the event the Regulatory Services Managers fail to resolve a dispute pursuant to this Section 6(b) within a reasonable time of receiving notice of such dispute from a party, then the parties shall refer the dispute to the employee identified on *Exhibit 2* as its respective Senior Officer (the “Senior Officer”) and such Senior Officers shall attempt in good faith to conclusively resolve any such dispute. On reasonable prior written notice to the other, NYSE and FINRA shall each have the right to replace its respective Senior Officer with an officer with comparable rank, knowledge, expertise and decision-making authority. If the Senior Officers are unable to resolve the dispute amicably within 30 days, the dispute will be resolved by binding arbitration between the parties as provided herein. Arbitration shall be conducted by a single arbitrator agreed upon by the parties in accordance with the arbitration rules of the American Arbitration Association (the “AAA”); *provided,* that, if the parties cannot agree on the identity of the arbitrator, then the arbitrator shall be chosen by the AAA in accordance with its rules. All arbitration hearings shall be conducted in New York, New York. Each party shall pay its own costs for the arbitration, with the cost of the arbitrator to be equally divided between the parties; *provided,* that the arbitrator may, in his or her discretion, award reasonable attorneys' fees and expenses to the prevailing party. The arbitrator will have no authority to award punitive damages or any other damages not measured by the prevailing party's actual damages, and may not, in any event, make any ruling, finding or award that does not conform to the terms and conditions of this Agreement. A judgment upon an award may be entered in any court having jurisdiction. No party or the arbitrator may disclose the existence, content, or results of any arbitration hereunder without the prior written consent of the other parties, other than to the Commission. Except as otherwise expressly set forth in this Agreement, the procedures set forth in this Section 6(b) must be satisfied as a condition precedent to a party commencing any arbitration in connection with any dispute arising hereunder. A party's failure to comply with the preceding sentence shall constitute cause for the dismissal without prejudice of any such arbitration.

(c)Continuity of Services. Each party acknowledges that the timely and complete performance of its obligations pursuant to this Agreement is critical to the business and operations of the other party. In the event of a dispute between the parties, the parties will continue to perform their respective obligations under this Agreement in good faith during the resolution of such dispute unless and until this Agreement is terminated in accordance with its provisions. Nothing in this Section 6(c) will interfere with a party's right to terminate this Agreement as set forth in this Agreement. 7. *No Restrictions on Regulatory Action.* Nothing contained in this Agreement shall restrict or in any way encumber the right of either party to conduct its own independent or concurrent investigation, examination or enforcement proceeding of or against Dual Members, as either party, in its sole discretion, shall deem appropriate or necessary. 8. *Limitation of Liability.* None of the parties nor any of their respective directors, governors, officers, employees, affiliates or agents shall be liable to any other party or such party's directors, governors, officers, employees, affiliates or agents for any liability, loss or damage resulting from any delays, inaccuracies, errors or omissions with respect to its performing or failing to perform its obligations under this Agreement, except as otherwise provided for under the Act or for any liability, loss or damage resulting from the gross negligence, willful misconduct, reckless disregard or breach of confidentiality by a party or its directors, governors, officers, employees, affiliates or agents. The parties understand and agree with each other that the Regulatory Responsibilities are being performed on a good faith and best effort basis and no warranties, express or implied, are made by any party to any other party with respect to any of the obligations to be performed by the parties hereunder. 9. *Commission Approval.*

(a)The parties agree to file promptly this Agreement with the Commission for its review and approval. This Agreement shall be effective upon approval of the Commission, contingent upon the closing of the Transaction.

(b)If approved by the Commission, FINRA will notify Dual Members of the general terms of the Agreement and its impact on such members. The notice will be sent on behalf of both parties and, prior to being sent, NYSE will review and approve the notice. 10. *Applicability of Certain Laws.* Notwithstanding any provision hereof, this Agreement shall be subject to any applicable federal or state statute, or any rule or order of the Commission, or industry agreement, restructuring the regulatory framework of the securities industry or reassigning regulatory responsibilities between self-regulatory organizations. To the extent such statute, rule, order or agreement is inconsistent with one or more provisions of this Agreement, such statute, rule, order or agreement shall supersede the provision(s) hereof to the extent necessary to be properly effectuated and the provision(s) hereof in that respect shall be null and void. 11. *Definitions.* Unless otherwise defined in this Agreement, or unless the context otherwise requires, the terms used in this Agreement shall have the same meaning as they have under the Act and the rules and regulations promulgated by the Commission thereunder. 12. *Severability.* Any term or provision of this Agreement that is invalid or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of this Agreement or affecting the validity or enforceability of any of the terms or provisions of this Agreement in any other jurisdiction. 13. *Amendment.* This Agreement may be amended in writing duly approved by each party. All such amendments must be filed with and approved by the Commission before they become effective. 14. *Termination.* This Agreement may be terminated by NYSE or FINRA at any time upon the approval of the Commission after 180 days written notice to the other party. 15. *General.* The parties agree to perform all acts and execute all supplementary instruments or documents that may be reasonably necessary or desirable to carry out the provisions of this Agreement. 16. *Liaison and Notices.* All questions regarding the implementation of this Agreement shall be directed to the persons identified in subsections (a),

(b)and (c), as applicable, below. All notices and other communications required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly given upon

(i)actual receipt by the notified party or

(ii)constructive receipt (as of the date marked on the return receipt) if sent by certified or registered mail, return receipt requested, to the following addresses:

(a)If to NYSE Regulation: NYSE Regulation, Inc., 20 Broad Street, New York, New York 10005. Telephone:

(212)656-3000, Facsimile:

(212)656-8101, Attention: General Counsel Regulatory Services Manager.

(b)If to New York Stock Exchange, LLC.: New York Stock Exchange, LLC., 11 Wall Street, New York, NY 10005. Telephone:

(212)656-3000, Facsimile:

(212)656-8101, Attention: General Counsel.

(c)If to FINRA: Financial Industry Regulatory Authority, Inc., 1735 K Street, NW., Washington, DC 20006-1500. Telephone:

(202)728-8071, Facsimile:

(202)728-8075, Attention: General Counsel Regulatory Services Manager. 17. *Relief from Regulatory Responsibility.* Pursuant to Section 17(d)(1)(A) of the Act, and Rule 17d-2 thereunder, NASD and the NYSE jointly request the SEC, upon its approval of this Agreement, to relieve the NYSE of any and all responsibilities with respect to the matters allocated to NASD or FINRA pursuant to this Agreement for purposes of Sections 17(d) and 19(g) of the Act. 18. *Governing Law.* This Agreement shall be deemed to have been made in the State of New York, and shall be construed and enforced in accordance with the law of the State of New York, without reference to principles of conflicts of laws thereof. Each of the parties hereby consents to submit to the jurisdiction of the courts by or for the State of New York or the United States District Court for the Southern District of New York in connection with any action or proceeding relating to this Agreement. 19. *Survival of Provisions.* Provisions intended by their terms or context to survive and continue notwithstanding delivery of the regulatory services by FINRA, the payment of the price by the NYSE, and any termination of this Agreement shall survive and continue. 20. *Prior Agreements.* This Agreement is wholly separate from the multiparty Agreement made pursuant to Rule 17d-2 of the Exchange Act between the American Stock Exchange LLC, the Boston Stock Exchange, Inc., the Chicago Board Options Exchange, Incorporated, the International Securities Exchange LLC., the National Association of Securities Dealers, Inc., the New York Stock Exchange, LLC., the NYSE Arca, Inc., and the Philadelphia Stock Exchange, Inc. involving the allocation of regulatory responsibilities with respect to common members for compliance with common rules relating to the conduct by broker-dealers of accounts for listed options or index warrants entered into on December 1, 2006, and as may be amended from time to time. 21. *Counterparts.* This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, and such counterparts together shall constitute but one and the same instrument. In Witness Whereof, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first written above. National Association of Securities Dealers, Inc. By: Name: Title: New York Stock Exchange, LLC. By: Name: Title: NYSE Regulation, Inc. By: Name: Title: Exhibit 1—List Of Common Rules As referenced in paragraph 2(d)(v) of the Agreement, rules designated with a “*” are Non-Exclusive Common Rules, and NYSE shall retain regulatory responsibility for these rules insofar as necessary to discharge its Retained Responsibilities. NYSE Rule FINRA Rule *Rule 1 “The Exchange” NYSE Rule 1 “The Exchange.” *Rule 2 “Member,” “Membership,” “Member Firm,” etc. NYSE Rule 2 “Member,” “Membership,” “Member Firm,” etc. *Rule 2A “Jurisdiction” NYSE Rule 2A “Jurisdiction.” *Rule 2B No Affiliation between Exchange and any Member Organization NYSE Rule 2B No Affiliation between Exchange and any Member Organization. *Rule 3 “Security” NYSE Rule 3 “Security.” *Rule 4 “Stock” NYSE Rule 4 “Stock.” *Rule 5 “Bond” NYSE Rule 5 “Bond.” *Rule 6 “Floor” NYSE Rule 6 “Floor.” *Rule 8 “Delivery” NYSE Rule 8 “Delivery.” *Rule 9 “Branch Office Manager” NYSE Rule 9 “Branch Office Manager.” *Rule 10 “Registered Representative” NYSE Rule 10 “Registered Representative.” *Rule 11 Effect of Definitions NYSE Rule 11 Effect of Definitions. *Rule 12 “Business Day” NYSE Rule 12 “Business Day.” *Rule 134 Differences and Omissions—Cleared Transactions NYSE Rule 134 Differences and Omissions—Cleared Transactions. Rule 176 Delivery Time NYSE Rule 176 Delivery Time. Rule 177 Delivery Time—“Cash” Contracts NYSE Rule 177 Delivery Time—“Cash” Contracts. Rule 180 Failure to Deliver NYSE Rule 180 Failure to Deliver. Rule 282 Buy-in Procedures NYSE Rule 282 Buy-in Procedures. Rule 283 Members Closing Contracts—Procedure NYSE Rule 283 Members Closing Contracts—Procedure. Rule 285 Notice of Intention to Successive Parties NYSE Rule 285 Notice of Intention to Successive Parties. Rule 286 Closing Portion of Contract NYSE Rule 286 Closing Portion of Contract. Rule 287 Liability of Succeeding Parties NYSE Rule 287 Liability of Succeeding Parties. Rule 288 Notice of Closing to Successive Parties NYSE Rule 288 Notice of Closing to Successive Parties. Rule 289 Must Receive Delivery NYSE Rule 289 Must Receive Delivery. Rule 290 Defaulting Party May Deliver After “Buy-In” Notice NYSE Rule 290 Defaulting Party May Deliver After “Buy-In” Notice. Rule 291 Failure to Fulfill Closing Contract NYSE Rule 291 Failure to Fulfill Closing Contract. Rule 292 Restrictions on Members' Participation in Transaction to Close Defaulted Contracts NYSE Rule 292 Restrictions on Members' Participation in Transaction to Close Defaulted Contracts. Rule 293 Closing Contracts in Suspended Securities NYSE Rule 293 Closing Contracts in Suspended Securities. Rule 294 Default in Loan of Money NYSE Rule 294 Default in Loan of Money. Rule 296 Liquidation of Securities Loans and Borrowings NYSE Rule 296 Liquidation of Securities Loans and Borrowings. Rule 311 Formation and Approval of Member Organizations NYSE Rule 311 Formation and Approval of Member Organizations. Rule 312 Changes Within Member Organizations NYSE Rule 312 Changes Within Member Organizations. Rule 313 Submission of Partnership Articles—Submission of Corporate Documents NYSE Rule 312 Submission of Partnership Articles—Submission of Corporate Documents. Rule 319 Fidelity Bonds NYSE Rule 319 Fidelity Bonds. Rule 321 Formation of Acquisition of Subsidiaries NYSE Rule 321 Formation of Acquisition of Subsidiaries. Rule 322 Guarantees by, or Flow Through Benefits for Members or Member Organizations NYSE Rule 322 Guarantees by, or Flow Through Benefits for Members or Member Organizations. *Rule 325 Capital Requirements Members Organizations NYSE Rule 325 Capital Requirements Members Organizations. Rule 326(a) Growth Capital Requirement NYSE Rule 326(a) Growth Capital Requirement. Rule 326(b) Business Reduction Capital Requirement NYSE Rule 326(b) Business Reduction Capital Requirement. Rule 326(c) Business Reduction Capital Requirement NYSE Rule 326(c) Business Reduction Capital Requirement. Rule 326(d) Reduction of Elimination of Loans and Advances NYSE Rule 326(d) Reduction of Elimination of Loans and Advances. Rule 328 Sale-and-Leasebacks, Factoring, Financing and Similar Arrangements NYSE Rule 328 Sale-and-Leasebacks, Factoring, Financing and Similar Arrangements. *Rule 342 Offices—Approval, Supervision and Control NYSE Rule 342 Offices—Approval, Supervision and Control. Rule 343 Offices—Sole Tenancy, Hours, Display of Membership Certificates NYSE Rule 343 Offices—Sole Tenancy, Hours, Display of Membership Certificates. Rule 344 Research Analysts and Supervisory Analysts NYSE Rule 344 Research Analysts and Supervisory Analysts. Rule 345 Employees—Registration, Approval, Records NYSE Rule 345 Employees—Registration, Approval, Records. Rule 345A Continuing Education for Registered Persons NYSE Rule 345A Continuing Education for Registered Persons. Rule 346 Limitations—Employment and Association with Members and Member Organizations NYSE Rule 346 Limitations—Employment and Association with Members and Member Organizations. *Rule 350 Compensation or Gratuities to Employees of Others NYSE Rule 350 Compensation or Gratuities to Employees of Others. Rule 351 Reporting Requirements NYSE Rule 351 Reporting Requirements. Rule 352 Guarantees, Sharing in Accounts, and Loan Arrangements NYSE Rule 352 Guarantees, Sharing in Accounts, and Loan Arrangements. Rule 353 Rebates and Compensation NYSE Rule 353 Rebates and Compensation. Rule 354 Reports to Control Persons NYSE Rule 354 Reports to Control Persons. *Rule 375 Missing the Market NYSE Rule 375 Missing the Market. Rule 382 Carrying Agreements NYSE Rule 382 Carrying Agreements. Rule 387 COD Orders NYSE Rule 387 COD Orders. *Rule 392 Notification Requirements for Offerings of Listed Securities NYSE Rule 392 Notification Requirements for Offerings of Listed Securities. *Rule 401 Business Conduct NYSE Rule 401 Business Conduct. Rule 401A Customer Complaints NYSE Rule 401A Customer Complaints. Rule 402 Customer Protection-Reserves and Custody of Securities NYSE Rule 402 Customer Protection-Reserves and Custody of Securities. Rule 404 Individual Members Not To Carry Accounts NYSE Rule 404 Individual Members Not To Carry Accounts. Rule 405 Diligence as to Accounts NYSE Rule 405 Diligence as to Accounts. Rule 405A Non-Managed Fee-Based Account Programs—Disclosure and Monitoring NYSE Rule 405A Non-Managed Fee-Based Account Programs—Disclosure and Monitoring. Rule 406 Designation of Accounts NYSE Rule 406 Designation Of Accounts. *Rule 407 Transactions-Employees of Members, Member Organizations and the Exchange NYSE Rule 407 Transactions—Employees of Members, Member Organizations and the Exchange. *Rule 407A Disclosure of All Member Accounts NYSE Rule 407A Disclosure of All Member Accounts. Rule 408 Discretionary Power in Customers' Accounts NYSE Rule 408 Discretionary Power in Customers' Accounts. Rule 409 Statements of Accounts to Customers NYSE Rule 409 Statements of Accounts to Customers. Rule 409A SIPC Disclosures NYSE Rule 409A SIPC Disclosures. *Rule 410 Records of Orders NYSE Rule 410 Records of Orders. *Rule 411 Erroneous Reports NYSE Rule 411 Erroneous Reports. Rule 412 Customer Account Transfer Contracts NYSE Rule 412 Customer Account Transfer Contracts. Rule 413 Uniform Forms NYSE Rule 413 Uniform Forms. *Rule 414 Index and Currency Warrants NYSE Rule 414 Index and Currency Warrants. *Rule 416 Questionnaires and Reports NYSE Rule 416 Questionnaires and Reports. *Rule 416A Member and Member Organization Profile Information Updates and Quarterly Certifications Via the Electronic Filing Platform NYSE Rule 416A Member and Member Organization Profile Information Updates and Quarterly Certifications Via the Electronic Filing Platform. Rule 418 Audit NYSE Rule 418 Audit. Rule 420 Reports of Borrowings and Subordinate Loans for Capital Purposes NYSE Rule 420 Reports of Borrowings and Subordinate Loans for Capital Purposes. Rule 421 Periodic Reports NYSE Rule 421 Periodic Reports. Rule 424 Reports of Options NYSE Rule 424 Reports of Options. Rule 430 Partial Delivery of Securities to Customers on C.O.D. Purchases NYSE Rule 430 Partial Delivery of Securities to Customers on C.O.D. Purchases. Rule 431 Margin Requirements NYSE Rule 431 Margin Requirements. Rule 432 Daily Record of Required Margin NYSE Rule 432 Daily Record of Required Margin. Rule 434 Required Submission of Requests for Extensions of Time for Customers NYSE Rule 434 Required Submission of Requests for Extensions of Time for Customers. *Rule 435 Miscellaneous Prohibitions (Excessive Trading by Members) NYSE Rule 435 Miscellaneous Prohibitions (Excessive Trading by Members). Rule 436 Interest on Credit Balances NYSE Rule 436 Interest on Credit Balances. *Rule 440 Books and Records NYSE Rule 440 Books and Records. Rule 440A Telephone Solicitation NYSE Rule 440A Telephone Solicitation. Rule 440F Public Short Sale Transactions Effected on the Exchange NYSE Rule 440F Public Short Sale Transactions Effected on the Exchange. Rule 440G Transactions in Stocks and Warrants for the Accounts of Members, Allied Members and Member Organizations NYSE Rule 440G Transactions in Stocks and Warrants for the Accounts of Members, Allied Members and Member Organizations. Rule 440I Records of Compensation Arrangements—Floor Brokerage NYSE Rule 440I Records of Compensation Arrangements—Floor Brokerage. Rule 445 Anti-Money Laundering Compliance Program NYSE Rule 445 Anti-Money Laundering Compliance Program. Rule 446 Business Continuity and Contingency Plans NYSE Rule 446 Business Continuity and Contingency Plans. Rule 472 Communications with the Public NYSE Rule 472 Communications with the Public. *Rule 477 Retention of Jurisdiction—Failure to Cooperate NYSE Rule 477 Retention of Jurisdiction—Failure to Cooperate. Rule 700 Applicability, Definitions and References NYSE Rule 700 Applicability, Definitions and References. Rule 704 Position Limits NYSE Rule 704 Position Limits. Rule 705 Exercise Limits NYSE Rule 705 Exercise Limits. Rule 707 Liquidation of Positions NYSE Rule 707 Liquidation of Positions. Rule 709 Other Restrictions on Exchange Option Transactions and Exercises NYSE Rule 709 Other Restrictions on Exchange Option Transactions and Exercises. Rule 720 Registration of Options Principals NYSE Rule 720 Registration of Options Principals. Rule 721 Opening of Accounts NYSE Rule 721 Opening of Accounts. Rule 722 Supervision of Accounts NYSE Rule 722 Supervision of Accounts. Rule 723 Suitability NYSE Rule 723 Suitability. Rule 724 Discretionary Accounts NYSE Rule 724 Discretionary Accounts. Rule 725 Confirmations NYSE Rule 725 Confirmations. Rule 726 Delivery of Options Disclosure Document and Prospectus NYSE Rule 726 Delivery of Options Disclosure Document and Prospectus. Rule 727 Transactions with Issuers NYSE Rule 727 Transactions with Issuers. Rule 728 Registered Stock NYSE Rule 728 Registered Stock. Rule 730 Statement of Accounts NYSE Rule 730 Statement of Accounts. Rule 732 Customer Complaints NYSE Rule 732 Customer Complaints. Rule 780 Exercise of Option Contracts NYSE Rule 780 Exercise of Option Contracts. Rule 781 Allocation of Exercise Assignment Notices NYSE Rule 781 Allocation of Exercise Assignment Notices. Rule 791 Communications to Customers NYSE Rule 791 Communications to Customers. Exhibit 2 For purposes of this Agreement, the Regulatory Services Managers required under paragraph 6 shall be: *For NYSE Regulation:* Susan Axelrod, Chief of Staff, NYSE Regulation, Inc., 11 Wall Street, New York, NY 10005,

(212)656-2347 (phone),

(212)656-5788 (fax). *For NASD/FINRA:* James F. Price, Jr., Vice President, Business & Exchange Solution, FINRA, 9509 Key West Avenue, Rockville, MD 20850-3329,

(240)386-4608 (phone),

(240)386-5139 (fax). For purposes of this Agreement, the Senior Officers required under paragraph 6 shall be: *For NYSE Regulation:* Richard G. Ketchum, Chief Regulatory Officer, NYSE Regulation, Inc., 20 Broad Street, New York, NY 10005,

(212)656-2789 (phone),

(212)656-5809 (fax). *For NASD/FINRA:* Stephen I. Luparello, Senior Executive Vice President, FINRA, 1735 K Street, NW., Washington, DC 20006,

(202)728-6947 (phone),

(202)728-8075 (fax). III. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the 17d-2 Plan 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/other.shtml* ); or • Send an e-mail to *rule-comments@sec.gov.* Please include File Number 4-544 on the subject line. Paper Comments • Send paper comments in triplicate to Nancy M. Morris, Secretary, Securities and Exchange Commission, Station Place, 100 F Street, NE., Washington, DC 20549-1090. All submissions should refer to File Number 4-544. 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/other.shtml* ). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed plan that are filed with the Commission, and all written communications relating to the proposed plan 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 on official business days between the hours of 10 a.m. and 3 p.m. Copies of the Plan also will be available for inspection and copying at the principal offices of NASD and NYSE. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number 4-544 and should be submitted on or before August 22, 2007. IV. Discussion The Commission finds that the proposed Plan is consistent with the factors set forth in Section 17(d) of the Act 23 and Rule 17d-2(c) thereunder ** 24 in that the Plan is necessary or appropriate in the public interest and for the protection of investors, fosters cooperation and coordination among SROs, and removes impediments to and fosters the development of the national market system. In particular, the Commission believes that the Plan will reduce unnecessary regulatory duplication by fostering cooperation and coordination between NYSE and FINRA, and will thereby remove impediments to the development of the national market system. In particular, the Plan will allocate to FINRA certain responsibilities for Dual Members that would otherwise be performed by both NYSE and FINRA following the closing of the Transaction. Accordingly, the Plan promotes efficiency by reducing costs to Dual Members. Furthermore, because NYSE and FINRA will coordinate their regulatory functions in accordance with the Plan, the Plan should promote investor protection and the public interest. 23 15 U.S.C. 78q(d). 24 17 CFR 240.17d-2(c). Under paragraph

(c)of Rule 17d-2, the Commission may, after appropriate notice and opportunity for comment, declare a plan, or any part of a plan, effective. 25 In this instance, the Commission believes that appropriate notice and comment can take place after the proposed Plan is effective. The purpose of the 17d-2 Plan is to allocate regulatory responsibilities for certain member conduct rules from NYSE to FINRA in connection with the proposed consolidation of NYSE Regulation's and NASD's member regulation operations. 26 As discussed above, for an interim period while FINRA develops a single rulebook to apply to all Dual Members, it has adopted into its rulebook the Incorporated NYSE Rules, and it is those exact same rules that constitute the List of Common Rules covered by the 17d-2 Plan. As such, the NYSE rules covered by the 17d-2 Plan for which FINRA will assume regulatory responsibilities will, at least initially, be identical to the Incorporated NYSE Rules on FINRA's own rulebook. Thus, the Plan will benefit Dual Members by avoiding duplicative regulation by two separate SROs of identical rules. The Commission, therefore, believes it is appropriate to herein declare effective the proposed 17d-2 Plan, so that it may be effective upon the closing of the Transaction. 25 *Id.* 26 *See* By-Law Amendments Filing, *supra* note 15. The Commission notes that, under the proposed Plan, NYSE and NASD have allocated regulatory responsibility for the Common Rules to the extent that such responsibilities involve member firm regulation. 27 The Plan further sets forth those areas for which NYSE will retain full regulatory responsibility, including: Examinations of Dual Member conduct covered by NYSE-only Rules and/or by federal laws or regulations; surveillance, investigation, and enforcement with respect to conduct relating to trading on or through the systems and facilities of NYSE and conduct otherwise covered by NYSE-only Rules, as well as whether such conduct may constitute a violation of federal laws or regulations; processing of applications for trading licenses or other membership in NYSE; and qualification and registration of firm personnel to effect transactions or work on the Floor of NYSE pursuant to its unique rules. 28 27 *See infra* text accompanying notes 29-30 (discussing those Common Rules that are deemed to be Non-Exclusive Common Rules, for which NYSE will retain certain regulatory responsibilities). 28 *See* Paragraphs 2(d)(i)-(iv) of the proposed 17d-2 Plan. The Commission notes that the proposed Plan also provides that NYSE will retain regulatory responsibility for the application of any Common Rule as it pertains to matters other than member firm regulation, including matters relating to the NYSE's exclusive retained responsibilities as set forth in the Plan and noted above (the “Non-Exclusive Common Rules”). 29 The Non- Exclusive Common Rules are specifically annotated in the List of Common Rules and include those rules for which FINRA and NYSE will each bear their respective regulatory responsibilities, consistent with the scope of the 17d-2 Plan. Notably, such rules are “non-exclusive” in the sense that they have aspects that may relate to member firm regulation (for which FINRA would assume regulatory responsibility) and aspects that may relate to matters other than member firm regulation (for which the NYSE would retain regulatory responsibility). 30 Accordingly, both NYSE and FINRA will bear responsibility for the application of each Non-Exclusive Common Rule as it relates to their particular regulatory responsibilities. 29 *See* Paragraph 2(d)(v) of the proposed 17d-2 Plan and the List of Common Rules. Because NYSE will retain responsibility for all rules related to market regulation, as well as Common Rules as they pertain to matters other than member regulation, the Commission staff believes that the proposed Plan does not adversely affect NYSE's ability to ensure compliance with the outstanding undertakings contained in two recent settlement orders relating to trading violations by certain NYSE floor members. *See* Order Instituting Public Administrative Proceedings Pursuant to Sections 19(h)(1) and 21C of the Securities Exchange Act of 1934, Making Findings, Ordering Compliance with Undertakings, and Imposing a Censure and Cease-and-Desist Order, File No. 3-11892, Release No. 34-51524 (April 12, 2005); and Order Instituting Public Proceedings Pursuant to Section 19(h)(1) of the Securities Exchange Act of 1934, Making Findings and Ordering Compliance with Undertakings, File No. 3-9925, Release No. 34-41574 (June 29, 1999). 30 For example, a Non-Exclusive Common Rule may contain multiple provisions, certain of which relate to matters of NYSE's retained responsibilities under the Plan, such as trading-related provisions. According to the Plan, whenever either NYSE or FINRA wishes to make a change to the substance of any Common Rule, before filing such proposed rule change with the Commission, it will inform the other party of the intended change to determine whether the other party will propose a conforming change to its version of the Common Rule. If the Parties do not agree to propose conforming changes, the Parties agree to file with the Commission an amendment to the 17d-2 Plan to delete such rule from the list of Common Rules. 31 Similarly, the Parties anticipate that when FINRA creates a consolidated rulebook, it is likely that the new FINRA rules that would replace existing Incorporated NYSE Rules might be substantially different from the then-existing NYSE rules. In such case, the NYSE would need to submit a proposed rule change and seek approval from the Commission to amend its corresponding rule to conform to the new FINRA rule. 32 31 *See* Paragraph 2(b) of the Plan. 32 *See* Paragraph 2(c) of the Plan. Further, the Parties thereafter would need to consider whether any amendments to the Plan or the List of Common Rules are required. Additionally, the Commission notes that, since the Plan allocates regulatory responsibility to FINRA for the oversight and enforcement of all NYSE rules on the list of Common Rules to the extent that such responsibilities involve member firm regulation, any additions to, deletions from, or other changes to the List of Common Rules pursuant to the aforementioned provisions or otherwise would constitute an amendment to the Plan, which must be filed with the Commission pursuant to Rule 17d-2 under the Act. The Plan permits NYSE and FINRA to terminate the Plan at any time, subject to 180 days written notice to the other party. The Commission notes, however, that while the Plan permits the Parties to terminate the Plan, the Parties cannot by themselves reallocate the regulatory responsibilities set forth in the Plan, since Rule 17d-2 under the Act requires that any allocation or re-allocation of regulatory responsibilities be filed with, and approved by, the Commission. 33 33 The Commission notes that paragraph 14 of the Plan reflects the fact that Commission approval of any termination of the Plan is required. Finally, the Plan also requires the Parties to share information on a number of matters. Specifically, the Parties must provide information to one another relating to possible financial or operational problems that may affect the ability of any Dual Member to conduct business and must also, upon request, make available to one another certain reports and documents set forth in the Plan, such as existing files, copies of examination reports, examination work papers, or investigative materials. Further, the Parties must promptly provide one another with copies of third-party complaints that relate to the other party's regulatory responsibilities under the Plan. The Parties also must promptly share information relating to any formal disciplinary actions or informal disciplinary actions taken involving a Dual Member or other certain individuals. The Commission believes that the information sharing provisions contained in the Plan further foster cooperation and coordination between NYSE and FINRA, thereby promoting investor protection and removing impediments to the development of a national market system. V. Conclusion This Order gives effect to the Plan filed with the Commission in File No. 4-544. The Parties shall notify all members affected by the Plan of their rights and obligations under the Plan. *It is therefore ordered,* pursuant to Sections 17(d) and 11A(a)(3)(B) of the Act, that the Plan in File No. 4-544, between NASD, NYSE, and NYSE Regulation filed pursuant to Rule 17d-2 under the Act, is approved and declared effective. *It is therefore ordered* that NYSE is relieved of those responsibilities allocated to FINRA under the Plan in File No. 4-544. For the Commission, by the Division of Market Regulation, pursuant to delegated authority. 34 34 17 CFR 200.30-3(a)(34). Florence E. Harmon, Deputy Secretary. [FR Doc. E7-14877 Filed 7-31-07; 8:45 am] BILLING CODE 8010-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-56127; File No. SR-Amex-2007-63] Self-Regulatory Organizations; American Stock Exchange LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to the Options Order Cancellation Fee July 24, 2007. Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”), 1 and Rule 19b-4 thereunder, 2 notice is hereby given that on June 27, 2007, the American Stock Exchange LLC (“Amex” or “Exchange”) filed with the Securities and Exchange Commission (“Commission”) the proposed rule change as described in Items I, II, and III below, which Items have been substantially prepared by the Exchange. The Amex has filed the proposed rule change as one establishing or changing a due, fee, or other charge imposed by the Exchange under section 19(b)(3)(A)(ii) of the Act 3 and Rule 19b-4(f)(2) thereunder, 4 which renders the proposal effective upon filing with the Commission. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b-4. 3 15 U.S.C. 78s(b)(3)(A)(ii). 4 17 CFR 240.19b-4(f)(2). I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to revise the options order cancellation fee. The text of the proposed rule change is available at Amex, the Commission's Public Reference Room, and *http://www.amex.com.* II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, Amex included statements concerning the purpose of, and basis for, the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. Amex has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose The Exchange proposes to revise the existing options order cancellation fee set forth in the Options Fee Schedule. The proposed revision would change the manner in which the fee is determined or calculated so that the cancellation fee of $1.00 is assessed to the executing Clearing Member for each order cancelled through the Amex Order File (“AOF”) in excess of the number of orders that the executing Clearing Member executes through AOF in a given month. 5 5 The operative date of the proposal was designated by Amex as July 1, 2007. The current options order cancellation fee set forth in the Options Fee Schedule differs in how the fee is assessed against executing Clearing Members. The fee of $1.00 is currently charged against an executing Clearing Member for every order that it cancels through the AOF in a given month when the total number of orders the executing Clearing Member canceled through AOF in that month exceeds the total number of orders that same Clearing Member executed through AOF in that same month. The fee does not apply to executing Clearing Members that cancel fewer than 500 orders through AOF in a given month. Accordingly, an executing Clearing Member is charged $1.00 for each cancelled order in a given month when such cancelled orders exceed executed orders through AOF unless the executing Clearing Member cancels fewer than 500 orders in such given month. The proposal seeks to change how the executing Clearing Member is assessed the order cancellation fee so that the fee pertains only to the excess of order cancellations versus order executions. The Exchange believes that the proposal will simplify the application of the options order cancellation fee and provide greater clarity to market participants. In addition, the Exchange submits that the proposal is similar to the order cancellation fee of other options exchanges. The Exchange believes that charging an options order cancellation fee, where applicable, for excess order cancellations is reasonable given the increase in costs to the Exchange that may occur as a result of a large volume of order cancellations. Accordingly, the Exchange seeks, through this proposal, to better manage the application of its options order cancellation fee. 2. Statutory Basis The Exchange asserts that the proposal is equitable as required by section 6(b)(4) of the Act. 6 In addition, the Exchange believes that the proposed rule change is consistent with section 6(b) of the Act, 7 in general, and furthers the objectives of section 6(b)(5), 8 in particular, in that it is designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and, in general, to protect investors and the public interest. 6 Section 6(b)(4) states that the rules of a national securities exchange provide for the equitable allocation of reasonable dues, fees, and other charges among its members and issuers and other persons using its facilities. 7 15 U.S.C. 78f(b). 8 15 U.S.C. 78f(b)(5). B. Self-Regulatory Organization's Statement on Burden on Competition The proposed rule change does not impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants or Others No written comments were solicited or received by the Exchange on this proposal. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Because the foregoing proposed rule change establishes or changes a due, fee, or other charged imposed by the Exchange, it has become effective pursuant to section 19(b)(3)(A) of the Act 9 and Rule 19b-4(f)(2) 10 thereunder. At any time within 60 days of the filing of the proposed rule change the Commission may summarily abrogate such proposed rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. 9 15 U.S.C. 78s(b)(3)(A). 10 17 CFR 19b-4(f)(2). IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change 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 *rule-comments@sec.gov* . Please include File Number SR-Amex-2007-63 on the subject line. Paper Comments • Send paper comments in triplicate to Nancy M. Morris, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090. All submissions should refer to File Number SR-Amex-2007-63. 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, 100 F. Street, NE., Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. Copies of such filing also will be available for inspection and copying at the principal office of Amex. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-Amex-2007-63 and should be submitted on or before August 22, 2007. For the Commission, by the Division of Market Regulation, pursuant to delegated authority. 11 11 17 CFR 200.30-3(a)(12). Florence E. Harmon, Deputy Secretary. [FR Doc. E7-14831 Filed 7-31-07; 8:45 am] BILLING CODE 8010-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-56129; File No. SR-BSE-2007-29] Self-Regulatory Organizations; Boston Stock Exchange, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change to Amend the Existing Fee Schedules July 25, 2007. Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”) 1 and Rule 19b-4 thereunder, 2 notice is hereby given that on June 28, 2007, the Boston Stock Exchange, Inc. (“BSE” or “Exchange”) filed with the Securities and Exchange Commission (“Commission”) the proposed rule change as described in Items I, II, and III below, which Items have been substantially prepared by the Exchange. The BSE has designated this proposal as one changing a due, fee, or other charge under section 19(b)(3)(A)(ii) of the Act 3 and Rule 19b-4(f)(2) thereunder, 4 which renders the proposal effective upon filing with the Commission. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b-4. 3 15 U.S.C. 78s(b)(3)(A)(ii). 4 17 CFR 240.19b-4(f)(2). I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change The BSE proposes to amend certain transaction fees set forth in the Boston Equities Exchange (“BeX”) fee schedule. The text of the proposed rule change is available at *http://www.bostonstock.com* , at the BSE, and at the Commission's Public Reference Room. II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of, and basis for, the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose On November 20, 2006, the BSE filed File No. SR-BSE-2006-44, a rule filing that amended the existing BSE fee schedule and established a fee schedule for the BeX, a facility of the Exchange. On March 5, 2007, a subsequent filing, SR-BSE-2007-13, was made to add a new Smart Order Routing fee. This fee is charged to Members on whose behalf an order is routed and who are also not members or subscribers of the away market center and, as a result, must utilize the give-up services provided through the Exchange. In this filing, the Exchange proposes to revise the rate for this service from $0.0050 per share to $0.0040 per share, with an operative date of July 1, 2007. The cost to the Exchange to provide this service has been reduced and, as a result, the Exchange proposes to pass these cost savings on to its Members. 2. Statutory Basis The Exchange believes that the proposed rule change is consistent with the requirements of section 6(b) of the Act, 5 in general, and furthers the objectives of section 6(b)(4) of the Act, 6 in particular, in that it is designed to provide for the equitable allocation of reasonable dues, fees and other charges among Exchange members and issuers and other persons using Exchange facilities. 5 15 U.S.C. 78f(b). 6 15 U.S.C. 78f(b)(4). B. Self-Regulatory Organization's Statement on Burden on Competition The Exchange does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others The Exchange has neither solicited nor received comments on the proposed rule change. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action The foregoing proposed rule change has been designated as a fee change pursuant to section 19(b)(3)(A)(ii) of the Act 7 and Rule 19b-4(f)(2) thereunder, 8 because it establishes or changes a due, fee, or other charge imposed by the Exchange. Accordingly, the proposal will take effect upon filing with the Commission. 7 15 U.S.C. 78s(b)(3)(A)(ii). 8 17 CFR 240.19b-4(f)(2). At any time within 60 days of the filing of the proposed rule change, the Commission may summarily abrogate such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change 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 *rule-comments@sec.gov.* Please include File Number SR-BSE-2007-29 on the subject line. Paper Comments: • Send paper comments in triplicate to Nancy M. Morris, Secretary, Securities and Exchange Commission, Station Place, 100 F Street, NE., Washington, DC 20549-1090. All submissions should refer to File Number SR-BSE-2007-29. 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, 100 F Street, NE., Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. Copies of such filing also will be available for inspection and copying at the principal office of the BSE. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-BSE-2007-29 and should be submitted on or before August 22, 2007. For the Commission, by the Division of Market Regulation, pursuant to delegated authority. 9 Florence E. Harmon, Deputy Secretary. 9 17 CFR 200.30-3(a)(12). [FR Doc. E7-14833 Filed 7-31-07; 8:45 am] BILLING CODE 8010-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-56132; File No. SR-CBOE-2007-71] Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing and Order Granting Accelerated Approval of Proposed Rule Change as Modified by Amendment No. 1 Relating to an Extension of the Linkage Fee Pilot Program July 25, 2007. Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”) 1 and Rule 19b-4 thereunder, 2 notice is hereby given that on June 28, 2007, the Chicago Board Options Exchange, Incorporated (“CBOE” or “Exchange”) filed with the Securities and Exchange Commission (“Commission”) the proposed rule change as described in Items I and II below, which Items have been substantially prepared by the Exchange. On July 20, 2007, CBOE filed Amendment No. 1 to the proposed rule change. This order provides notice of the proposed rule change, as modified by Amendment No. 1, and approves the proposed rule change, as amended, on an accelerated basis. 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b-4. I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change CBOE proposes to amend its Fees Schedule to extend until July 31, 2008 the Options Intermarket Linkage (“Linkage”) fees pilot program. The text of the proposed rule change is available at the Exchange, the Commission's Public Reference Room, and *http://www.cboe.org/legal.* II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of, and basis for, the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item III below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose The Exchange's fees for Principal Orders (“P Orders”) and Principal Acting as Agent Orders (“P/A Orders”) 3 are operating under a pilot program scheduled to expire on July 31, 2007. 4 The Exchange proposes to amend its Fees Schedule to extend the pilot program until July 31, 2008. 3 Under the Plan for the Purpose of Creating and Operating an Options Intermarket Linkage (“Plan”) and Exchange Rule 6.80(12), which tracks the language of the Plan, a “Linkage Order” means an Immediate or Cancel Order routed through the Linkage as permitted under the Plan. There are three types of Linkage Orders:

(i)“P/A Order,” which is an order for the principal account of a specialist (or equivalent entity an another Participant Exchange that is authorized to represent Public Customer orders), reflecting the terms of a related unexecuted Public Customer order for which the specialist is acting as agent;

(ii)“P Order,” which is an order for the principal account of an Eligible Market Maker and is not a P/A Order; and

(iii)“Satisfaction Order,” which is an order sent through the Linkage to notify a member of another Participant Exchange of a Trade-Through and to seek satisfaction of the liability arising from that Trade-Through. 4 *See* Securities Exchange Act Release No. 54272 (August 3, 2006), 71 FR 45865 (August 10, 2006) (SR-CBOE-2006-59). The Exchange assesses its members the following Linkage Order related fees:

(i)$.26 per contract transaction fee,

(ii)$.30 per contract Retail Automatic Execution System (“RAES”) access fee, if a Linkage Order is executed in whole or in part on RAES, and

(iii)$.10 per contract surcharge fee on transactions in options on the Nasdaq-100 Index (MNX and NDX) and options on the Russell 2000 Index (RUT). 5 Satisfaction Orders are not assessed Exchange fees. 5 *See* CBOE Fees Schedule, Footnote 14. Surcharge fees are also assessed on OEX, XEO, SPX, VIX, DJX and DXL options. However, Linkage fees do not apply to these products because they are not multiply listed. The Exchange believes that extension of the Linkage fee pilot program until July 31, 2008 will give the Exchange and the Commission further opportunity to evaluate the appropriateness of Linkage fees. The Exchange also proposes to amend section 21 of the Fees Schedule to change the Linkage fees pilot expiration date included in that section to July 31, 2008, thereby extending the term of the DPM Linkage Fees Credit program for P/A Orders. 2. Statutory Basis The proposed fee change is consistent with section 6(b) of the Act 6 in general, and furthers the objectives of section 6(b)(4) of the Act 7 in particular, in that it is designed to provide for the equitable allocation of reasonable dues, fees, and other charges among CBOE members and other persons using its facilities. 6 15 U.S.C. 78f(b). 7 15 U.S.C. 78f(b)(4). B. Self-Regulatory Organization's Statement on Burden on Competition CBOE does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants or Others No written comments were solicited or received with respect to the proposed rule change. III. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change 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 *rule-comments@sec.gov.* Please include File Number SR-CBOE-2007-71 on the subject line. Paper Comments • Send paper comments in triplicate to Nancy M. Morris, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090. All submissions should refer to File Number SR-CBOE-2007-71. 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, 100 F Street, NE., Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. Copies of such filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-CBOE-2007-71 and should be submitted on or before August 22, 2007. IV. Commission's Findings and Order Granting Accelerated Approval of the Proposed Rule Change After careful consideration, 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 and, in particular, the requirements of section 6(b) of the Act 9 and the rules and regulations thereunder. The Commission finds that the proposed rule change is consistent with section 6(b)(4) of the Act, 10 which requires that the rules of the Exchange provide for the equitable allocation of reasonable dues, fees, and other charges among its members and other persons using its facilities. The Commission believes that the extension of the Linkage fee pilot until July 31, 2008 will give the Exchange and the Commission further opportunity to evaluate whether such fees are appropriate. 8 In approving this rule change, the Commission notes that it has considered the proposal's impact on efficiency, competition, and capital formation. *See* 15 U.S.C. 78c(f). 9 15 U.S.C. 78f(b). 10 15 U.S.C. 78f(b)(4). The Commission also finds good cause for approving the proposed rule change prior to the 30th day after the date of publication of the notice of filing thereof in the **Federal Register** . The Commission believes that granting accelerated approval of the proposed rule change will preserve the Exchange's existing pilot program for Linkage fees without interruption as the Exchange and the Commission continue considering the appropriateness of Linkage fees. Therefore, the Commission finds good cause, consistent with section 19(b)(2) of the Exchange Act, 11 to approve the proposed rule change on an accelerated basis. 11 15 U.S.C. 78s(b)(2). V. Conclusion *It is therefore ordered,* pursuant to section 19(b)(2) of the Act, 12 that the proposed rule change (SR-CBOE-2007-71), as modified by Amendment No. 1, be, and it hereby is, approved on an accelerated basis. 12 15 U.S.C. 78s(b)(2). For the Commission, by the Division of Market Regulation, pursuant to delegated authority. 13 13 17 CFR 200.30-3(a)(12). Florence E. Harmon, Deputy Secretary. [FR Doc. E7-14837 Filed 7-31-07; 8:45 am] BILLING CODE 8010-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-56139; File No. SR-CBOE-2007-86] Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing and Immediate Effectiveness of Proposed Rule Change to Extend the Penny Pilot Program July 26, 2007. Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”), 1 and Rule 19b-4 thereunder, 2 notice is hereby given that on July 24, 2007, the Chicago Board Options Exchange, Incorporated (“CBOE” or “Exchange”) filed with the Securities and Exchange Commission (“Commission”) the proposed rule change as described in Items I and II below, which Items have been substantially prepared by the CBOE. The Exchange filed the proposal as a “non-controversial” proposed rule change pursuant to section 19(b)(3)(A)(iii) of the Act 3 and Rule 19b-4(f)(6) thereunder, 4 which rendered the proposal effective upon filing with the Commission. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b-4. 3 15 U.S.C. 78s(b)(3)(A)(iii). 4 17 CFR 240.19b-4(f)(6). I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to extend the Penny Pilot Program. The text of the proposed rule change is available at CBOE, the Commission's Public Reference Room, and *http://www.cboe.com.* II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, CBOE included statements concerning the purpose of, and basis for, the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose On January 23, 2007, the Commission approved CBOE's rule filing (SR-CBOE-2006-92), 5 which permits thirteen option classes to quote in penny increments in connection with the implementation of an industry wide, six month Penny Pilot Program. 6 The Penny Pilot Program is scheduled to expire on July 26, 2007. CBOE proposes to extend the Penny Pilot Program in the thirteen option classes for an additional two months, until September 27, 2007, while the Commisison analyzes whether to expand the Pilot, and if so, by how much. CBOE understands that all options exchanges are submitting similar rule filings to extend the duration of the Penny Pilot Program until September 27, 2007. 5 *See* Securities Exchange Act Release No. 55154 (January 23, 2007), 72 FR 4743 (February 1, 2007) (SR-CBOE-2006-92). 6 The Exchange acknowledged that the approval order permitted quoting in penny increments in the Pilot classes. Telephone conversation between Patrick Sexton, Associate General Counsel, CBOE, Jennifer L. Colihan, Special Counsel, Division of Market Regulation (“Division”), Commission, and Johnna B. Dumler, Special Counsel, Division, Commission, on July 25, 2007. 2. Statutory Basis The Exchange believes that its proposal is consistent with section 6(b) of the Act 7 in general, and furthers the objectives of section 6(b)(5) of the Act 8 in particular, in that it is designed to promote just and equitable principles of trade, to prevent fraudulent and manipulative acts, and, in general, to protect investors and the public interest. 7 15 U.S.C. 78f(b). 8 15 U.S.C. 78f(b)(5). B. Self-Regulatory Organization's Statement on Burden on Competition The Exchange does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others No written comments were either solicited or received by the Exchange. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action The proposed rule change has become effective pursuant to section 19(b)(3)(A) of the Act 9 and Rule 19b-4(f)(6) thereunder, 10 because the foregoing proposed rule does not:

(i)Significantly affect the protection of investors or the public interest;

(ii)impose any significant burden on competition; and

(iii)become operative for 30 days from the date on which it was filed, or such shorter time as the Commission may designate if consistent with the protection of investors and the public interest. 9 15 U.S.C. 78s(b)(3)(A). 10 17 CFR 240.19b-4(f)(6). A proposed rule change filed under Rule 19b-4(f)(6) normally may not become operative prior to 30 days after the date of filing. 11 However, Rule 19b-4(f)(6)(iii) permits the Commission to designate a shorter time if such action is consistent with the protection of investors and the public interest. 12 The Exchange has requested that the Commission waive the 30-day operative delay. The Commission believes that waiving the 30-day operative delay is consistent with the protection of investors and the public interest because such waiver will ensure continuity of the Exchange's rules and will allow the Penny Pilot Program to remain in effect without interruption. For these reasons, the Commission designates the proposal to be operative upon filing with the Commission. 13 11 17 CFR 240.19b-4(f)(6)(iii). In addition, Rule 19b-4(f)(6)(iii) requires the self-regulatory organization to give the Commission notice of its intent to file the proposed rule change, along with a brief description and text of the proposed rule change, at least five business days prior to the date of filing of the proposed rule change, or such shorter time as designated by the Commission. CBOE has satisfied the five-day pre-filing requirement. 12 17 CFR 240.19b-4(f)(6)(iii). 13 For purposes only of waiving the 30-day operative delay, the Commission has considered the proposed rule's impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f). At any time within 60 days of the filing of the proposed rule change, the Commission may summarily abrogate such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. 14 14 *See* 15 U.S.C. 78s(b)(3)(C). IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change 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 *rule-comments@sec.gov.* Please include File Number SR-CBOE-2007-86 on the subject line. Paper Comments • Send paper comments in triplicate to Nancy M. Morris, Secretary, Securities and Exchange Commission, 100 F. Street, NE., Washington, DC 20549-1090. All submissions should refer to File Number SR-CBOE-2007-86. 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, 100 F Street, NE., Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. Copies of the filing also will be available for inspection and copying at the principal office of the CBOE. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-CBOE-2007-86 and should be submitted on or before August 22, 2007. For the Commission, by the Division of Market Regulation, pursuant to delegated authority. 15 Florence E. Harmon, Deputy Secretary. 15 17 CFR 200.30-3(a)(12). [FR Doc. E7-14840 Filed 7-31-07; 8:45 am] BILLING CODE 8010-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-56126; File No. SR-DTC-2007-08] Self-Regulatory Organizations; The Depository Trust Company; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Relating to Use of the National Settlement Service July 24, 2007. Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”), 1 notice is hereby given that on May 1, 2007, The Depository Trust Company (“DTC”) filed with the Securities and Exchange Commission (“Commission”) the proposed rule change as described in Items I, II, and III below, which items have been prepared primarily by DTC. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. 1 15 U.S.C. 78s(b)(1). I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change The proposed rule change permits DTC to use the Federal Reserve Bank's National Settlement Service (“NSS”) for the settlement of credit balances. II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, DTC included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. DTC has prepared summaries, set forth in sections (A), (B), and

(C)below, of the most significant aspects of such statements. 2 2 The Commission has modified parts of these statements.

(A)Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In 2003, DTC mandated NSS as the vehicle for all DTC Settling Banks to satisfy their end of day net debits. 3 In an effort to increase the efficiencies afforded by NSS, DTC is modifying its rules and procedures to permit DTC's use of NSS to also distribute net credits. 4 Utilizing NSS as the payment mechanism for net credits will eliminate the need for DTC to initiate wire payments for settlement monies owed by DTC. However, should NSS not be available for any reason, DTC will retain the capability to satisfy its settlement obligations using wire transfer. 3 Securities Exchange Act Release No. 48089 (June 25, 2003), 68 FR 40314 (July 7, 2003) (File No. SR-DTC-2002-06). 4 The National Securities Clearing Corporation (“NSCC”) has submitted a similar proposed rule change (File No. SR-NSCC-2007-02) providing for the use of NSS for the distribution of net-net credits. The proposed rule change is consistent with the requirements of section 17A of the Act and the rules and regulations thereunder because it will not affect the safeguarding of funds or securities in DTC's custody and control or for which it is responsible.

(B)Self-Regulatory Organization's Statement on Burden on Competition DTC does not believe that the proposed rule change would have any impact or impose any burden on competition.

(C)Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others Written comments relating to the proposed rule change have not yet been solicited or received. DTC will notify the Commission of any written comments received by DTC. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action The foregoing rule change has become effective pursuant to section 19(b)(3)(A)(iii) of the Act 5 and Rule 19b-4(f)(4) 6 promulgated thereunder because the proposal effects a change in an existing service of DTC that

(A)Does not adversely affect the safeguarding of securities or funds in the custody or control of DTC or for which it is responsible and

(B)does not significantly affect the respective rights or obligations of DTC or persons using the service. At any time within sixty days of the filing of the proposed rule change, the Commission could have summarily abrogated such rule change if it appeared to the Commission that such action was necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. 5 15 U.S.C. 78s(b)(3)(A)(iii). 6 17 CFR 240.19b-4(f)(4). IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change 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 *rule-comments@sec.gov* . Please include File Number SR-DTC-2007-08 on the subject line. Paper Comments • Send paper comments in triplicate to Nancy M. Morris, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090. All submissions should refer to File Number SR-DTC-2007-08. 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, 100 F Street, NE., Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. Copies of such filing also will be available for inspection and copying at the principal office of DTC. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-DTC-2007-08 and should be submitted on or before August 22, 2007. For the Commission by the Division of Market Regulation, pursuant to delegated authority. 7 7 17 CFR 200.30-3(a)(12). Florence E. Harmon, Deputy Secretary. [FR Doc. E7-14830 Filed 7-31-07; 8:45 am] BILLING CODE 8010-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-56128; File No. SR-ISE-2007-55] Self-Regulatory Organizations; International Securities Exchange, LLC; Notice of Filing and Order Granting Accelerated Approval of Proposed Rule Change Relating to Linkage Fees July 24, 2007. Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”) 1 and Rule 19b-4 thereunder, 2 notice is hereby given that on June 29, 2007, the International Securities Exchange, LLC (“ISE” or “Exchange”) filed with the Securities and Exchange Commission (“Commission”) the proposed rule change as described in Items I and II below, which Items have been substantially prepared by the Exchange. This order provides notice of the proposed rule change and approves the proposed rule change on an accelerated basis. 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b-4. I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change ISE proposes to extend until July 31, 2008 the current pilot program regarding transaction fees charged for trades executed through the intermarket options linkage (“Linkage”). The text of the proposed rule change is available at the Exchange, the Commission's Public Reference Room, and *http://www.ise.com* . II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of, and basis for, the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item III below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose The purpose of this proposed rule change is to extend for one year the pilot program establishing ISE fees for Principal Orders (“P Orders”) and Principal Acting as Agent Orders (“P/A Orders”) sent through Linkage and executed on ISE. The fees currently are effective for a pilot period scheduled to expire on July 31, 2007. 3 This filing would extend the pilot program for another year, through July 31, 2008. 3 *See* Securities Exchange Act Release No. 54204 (July 25, 2006), 71 FR 43548 (August 1, 2006) (SR-ISE-2006-38) (extending the Linkage fee pilot program). ISE fees affected by this filing are: The Linkage P Order fee of $0.24 per contract; the Linkage P/A Order fee of $0.15 per contract; a surcharge fee of between $0.05 and $0.15 for trading certain licensed products; and a $0.03 comparison fee (collectively “linkage fees”). These are the same fees that all ISE members pay for non-customer transactions executed on the Exchange. 4 ISE does not charge for the execution of Satisfaction Orders 5 sent through Linkage and is not proposing to charge for such orders. 4 ISE charges these fees only to its members, generally firms who clear P Orders and P/A Orders for market makers on the other linked exchanges. 5 The term “Satisfaction Order” is defined in ISE Rule 1900(10)(iii). The Exchange believes it is appropriate to charge fees for P Orders and P/A Orders executed through Linkage. Notably, while market makers on competing exchanges always can match a better price on ISE, they never are obligated to send orders to ISE through Linkage. However, if such market makers do seek ISE's liquidity, whether through conventional orders or through the use of P Orders or P/A Orders, the Exchange believes it is appropriate to charge its members the same fees levied on other non-customer orders. ISE appreciates that there has been limited experience with Linkage and that the Commission is continuing to study Linkage in general and the effect of fees on Linkage trading. Thus, this filing would extend the status quo with Linkage fees for an additional year. 2. Statutory Basis The basis under the Act for this proposed rule change is the requirement under section 6(b)(4) 6 that an exchange have an equitable allocation of reasonable dues, fees, and other charges among its members and other persons using its facilities. As discussed above, ISE believes that this proposed rule change will equitably allocate fees by having all non-customer users of ISE transaction services pay the same fees. The Exchange believes that, if it were to not charge linkage fees, the Exchange's fee would not be equitable, in that ISE members would be subsidizing the trading of their competitors, all of whom access the same trading services. 6 15 U.S.C. 78f(b)(4). B. Self-Regulatory Organization's Statement on Burden on Competition The proposed rule change does not impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. Moreover, failing to adopt the proposed rule change would impose a burden on competition by requiring ISE members to subsidize the trading of their competitors. C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received from Members, Participants or Others The Exchange has not solicited, and does not intend to solicit, comments on this proposed rule change. The Exchange has not received any unsolicited written comments from members or other interested parties. III. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change 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 *rule-comments@sec.gov* . Please include File Number SR-ISE-2007-55 on the subject line. Paper Comments • Send paper comments in triplicate to Nancy M. Morris, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090. All submissions should refer to File Number SR-ISE-2007-55. 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, 100 F Street, NE., Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. Copies of such filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-ISE-2007-55 and should be submitted on or before August 22, 2007. IV. Commission's Findings and Order Granting Accelerated Approval of the Proposed Rule Change After careful consideration, 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, 7 and, in particular, the requirements of section 6(b) of the Act 8 and the rules and regulations thereunder. The Commission finds that the proposed rule change is consistent with section 6(b)(4) of the Act, 9 which requires that the rules of the Exchange provide for the equitable allocation of reasonable dues, fees, and other charges among its members and other persons using its facilities. The Commission believes that the extension of the Linkage fee pilot until July 31, 2008 will give the Exchange and the Commission further opportunity to evaluate whether such fees are appropriate. 7 In approving this rule change, the Commission notes that it has considered the proposal's impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). 8 15 U.S.C. 78f(b). 9 15 U.S.C. 78f(b)(4). The Commission also finds good cause for approving the proposed rule change prior to the 30th day after the date of publication of the notice of filing thereof in the **Federal Register** . The Commission believes that granting accelerated approval of the proposed rule change will preserve the Exchange's existing pilot program for Linkage fees without interruption as the Exchange and the Commission continue considering the appropriateness of Linkage fees. Therefore, the Commission finds good cause, consistent with section 19(b)(2) of the Exchange Act, 10 to approve the proposed rule change on an accelerated basis. 10 15 U.S.C. 78s(b)(2). V. Conclusion *It is therefore ordered,* pursuant to section 19(b)(2) of the Act, 11 that the proposed rule change (SR-ISE-2007-55), be and it hereby is, approved on an accelerated basis. 11 15 U.S.C. 78s(b)(2). For the Commission, by the Division of Market Regulation, pursuant to delegated authority. 12 12 17 CFR 200.30-3(a)(12). Florence E. Harmon, Deputy Secretary. [FR Doc. E7-14832 Filed 7-31-07; 8:45 am] BILLING CODE 8010-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-56130; File No. SR-NASDAQ-2007-061] Self-Regulatory Organizations; the NASDAQ Stock Market LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Institute a Pricing Incentive Program for Market Makers in Exchange-Traded Funds and Index-Linked Securities Date: July 25, 2007. Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”) 1 and Rule 19b-4 thereunder, 2 notice is hereby given that on July 18, 2007, The NASDAQ Stock Market LLC (“Nasdaq” or “Exchange”) filed with the Securities and Exchange Commission (“Commission”) the proposed rule change as described in Items I, II, and III below, which Items have been substantially prepared by Nasdaq. The Exchange has designated this proposal as one establishing or changing a due, fee, or other charge imposed by a self-regulatory organization pursuant to section 19(b)(3)(A)(ii) of the Act 3 and Rule 19b-4(f)(2) thereunder, 4 which renders the proposal effective upon filing with the Commission. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b-4. 3 15 U.S.C. 78s(b)(3)(A)(ii). 4 17 CFR 240.19b-4(f)(2). I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change Nasdaq proposes to institute a pricing incentive program for market makers in exchange-traded funds (“ETFs”) and index-linked securities (“ILSs”) listed on Nasdaq. 5 Nasdaq plans to implement the proposed rule change on August 1, 2007. The text of the proposed rule change is available at the Exchange, the Commission's Public Reference Room, and *http://www.nasdaq.com/about/LegalCompliance.stm.* 5 The Exchange's proposed rule text is contained in the Nasdaq 7000 Series (Charges for Membership, Services, and Equipment) at paragraph

(g)of Rule 7018 (Nasdaq Market Center Order Execution and Routing). II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, Nasdaq included statements concerning the purpose of, and basis for, the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. Nasdaq has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, Proposed Rule Change 1. Purpose Nasdaq proposes to introduce a pricing incentive program for market makers in ETFs and ILSs listed on Nasdaq. In April 2007, Nasdaq executed 34.8% of all transactions in ETFs listed on U.S. exchanges, making it the largest market for ETF transactions. Nasdaq also executes a large percentage of transactions in ILSs. However, Nasdaq currently lists fewer ETFs and ILSs than the New York Stock Exchange LLC and the American Stock Exchange LLC. The proposal is designed both to enhance Nasdaq's competitiveness as a listing venue for ETFs and ILSs and further strengthen its market quality as a transaction venue for ETFs and ILSs. Nasdaq proposes to adopt rules that are similar to those regarding NYSE Arca, Inc.'s (“NYSE Arca's”) program for Designated Market Makers. 6 Under NYSE Arca's program, a Designated Market Maker for a security listed on NYSE Arca is required to maintain minimum performance standards with regard to

(1)Percent of time at the national best bid (best offer) (“NBBO”),

(2)percent of executions better than the NBBO,

(3)average displayed size,

(4)average quoted spread, and

(5)in the case of derivative securities, the ability of the Designated Market Maker to transact in underlying markets. In return, the Designated Market Maker pays $0.0025 per share when accessing liquidity in stocks for which it is the Lead Market Maker, and receives a $0.004 per share credit when providing liquidity. 6 *See* NYSE Arca Equities Rule 7.24 (Designated Market Maker Performance Standards) and NYSE Arca Schedule of Fees and Charges for Exchange Services ( *http://www.nyse.com/pdfs/NYSEArca_Equities_Fees.pdf* ). Under Nasdaq's proposed program, a market maker in an ETF or ILS may become a “Designated Liquidity Provider” in a “Qualified Security” and receive similarly favorable incentive pricing. A Qualified Security must be an ETF or ILS listed on Nasdaq, have at least one Designated Liquidity Provider, and have a Nasdaq-designated maximum trading volume. Specifically, a security is no longer eligible to be a Qualified Security once there have been two calendar months in any three calendar-month period during which its average daily volume on Nasdaq exceeded 250,000 shares. Thus, the program is designed to encourage support of ETFs and ILSs during their period of initial listing, when the security must develop an active trading market in order to succeed. Once the volume threshold is reached, the pricing for the ETF or ILS would be consistent with pricing for other securities traded on Nasdaq. A “Designated Liquidity Provider” is a registered Nasdaq market maker in a Qualified Security that has committed to maintain minimum performance standards. Designated Liquidity Providers would be selected by Nasdaq based on factors including, but not limited to, experience with making markets in ETFs and ILSs, adequacy of capital, willingness to promote Nasdaq as a marketplace, issuer preference, operational capacity, support personnel, and history of adherence to Nasdaq rules and securities laws. Nasdaq may limit the number of Designated Liquidity Providers in a Qualified Security, or modify a previously established limit, upon prior written notice to members. Specifically, Nasdaq may modify such limit either to increase or decrease the number of Designated Liquidity Providers for a Qualified Security upon providing such prior written notice. As is true under the equivalent rules of NYSE Arca, the minimum performance standards applicable to a Designated Liquidity Provider may be determined from time to time by Nasdaq and may vary depending on the price, liquidity, and volatility of a particular Qualified Security. The performance measurements would include:

(1)Percent of time at the NBBO;

(2)percent of executions better than the NBBO;

(3)average displayed size; and

(4)average quoted spread. Nasdaq may remove Designated Liquidity Providers that do not meet the performance standards or that decide to change their status at any time. When accessing liquidity in a Qualified Security or routing to another market, the Designated Liquidity Provider would pay $0.003 per share executed; when providing liquidity, the Designated Liquidity Provider would receive a credit of $0.004 per share executed. Consistent with the requirements of Rule 610 of Regulation NMS, 7 however, in the unlikely event that the security trades at less than $1 per share, the normal execution fee and credit schedule in Nasdaq Rule 7018(a) regarding securities trading less than $1 would apply. 7 17 CFR 242.610. 2. Statutory Basis Nasdaq believes that the proposed rule change is consistent with the provisions of section 6 of the Act, 8 in general, and sections 6(b)(4) and 6(b)(5) of the Act, 9 in particular, in that it provides for the equitable allocation of reasonable dues, fees, and other charges among members and issuers and other persons using any facility or system which Nasdaq operates or controls, and is designed to promote just and equitable principles of trade, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest, respectively. Nasdaq believes that by allocating pricing benefits to certain market makers that make tangible commitments to enhancing market quality for ETFs and ILSs listed on Nasdaq, the proposal will encourage the development of new financial products, provide a better trading environment for investors in ETFs and ILSs, and encourage greater competition between listing venues for ETFs and ILSs. 8 15 U.S.C. 78f. 9 15 U.S.C. 78f(b)(4) and (5). B. Self-Regulatory Organization's Statement on Burden on Competition Nasdaq believes that the proposed rule change will encourage greater competition among venues that list ETFs and ILSs and further strengthen the quality of the Nasdaq market as a venue for transactions in ETFs and ILSs. Accordingly, Nasdaq does not believe that the proposed rule change will result in any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants or Others Nasdaq states that written comments were neither solicited nor received with respect to the proposed rule change. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action The foregoing proposed rule change has become effective pursuant to section 19(b)(3)(A)(ii) of the Act 10 and Rule 19b-4(f)(2) 11 thereunder because it establishes or changes a due, fee, or other charge imposed by the Exchange. At any time within 60 days of the filing of the proposed rule change, the Commission may summarily abrogate such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. 10 15 U.S.C. 78s(b)(3)(A)(ii). 11 17 CFR 19b-4(f)(2). IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change 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 *rule-comments@sec.gov.* Please include File Number SR-NASDAQ-2007-061 on the subject line. *Paper Comments* • Send paper comments in triplicate to Nancy M. Morris, Secretary, Securities and Exchange Commission, 100 F. Street, NE., Washington, DC 20549-1090. All submissions should refer to File Number SR-NASDAQ-2007-061. 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, 100 F. Street, NE., Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. Copies of such filing also will be available for inspection and copying at the principal office of Nasdaq. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-NASDAQ-2007-061 and should be submitted on or before August 22, 2007. For the Commission, by the Division of Market Regulation, pursuant to delegated authority. 12 12 17 CFR 200.30-3(a)(12). Florence E. Harmon, Deputy Secretary. [FR Doc. E7-14841 Filed 7-31-07; 8:45 am] BILLING CODE 8010-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-56124; File No. SR-NASD-2007-042] Self-Regulatory Organizations: National Association of Securities Dealers, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change to Delay the Implementation of NASD Interpretive Material 2210-4, which Requires Certain Member Firms to Provide a Hyperlink to http://www.nasd.com. July 24, 2007. Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”), 1 and Rule 19b-4 thereunder, 2 notice is hereby given that on June 27, 2007, the National Association of Securities Dealers, Inc. (“NASD” or “Exchange”) filed with the Securities and Exchange Commission (“Commission”) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by NASD. NASD filed the proposed rule change pursuant to section 19(b)(3)(A)(i) of the Act, 3 and Rule 19b-4(f)(1) thereunder, 4 as one constituting a stated policy, practice, or interpretation with respect to the meaning, administration, or enforcement of an existing rule, which renders the proposed rule change effective upon filing with the Commission. On July 20, 2007, NASD filed Amendment No. 1 to the proposed rule change. The Commission is publishing this notice to solicit comments on the proposed rule change, as amended, from interested persons. 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b-4. 3 15 U.S.C. 78s(b)(3)(A)(i). 4 17 CFR 240.19b-4(f)(1). I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change NASD is proposing to delay, until October 31, 2007, implementation of an amendment to Interpretive Material 2210-4 (“IM 2210-4”) 5 that was scheduled to be implemented on July 7, 2007. 6 The recent amendment to IM-2210-4 requires an NASD member referring to its NASD membership on its Web site to provide a hyperlink to the Internet domain *http://www.nasd.com* (“hyperlink requirement”). There are no proposed changes to the text of NASD rules. 5 *See* Securities Exchange Act Release No. 54740 (November 9, 2006), 71 FR 67184 (November 20, 2006) (SR-NASD-2006-073) (Order Approving Proposed Rule Change and Amendment No. 1 thereto and Notice of Filing and Order Granting Accelerated Approval to Amendment No. 2 to Amend NASD Interpretive Material 2210-4 to Require Certain Member Firms to Provide a Hyperlink to the NASD's Internet Home Page) (“Approval Order”). 6 As required by the Approval Order, unless amended, the implementation date of the hyperlink requirement will be 180 days following publication of Notice to Members 07-02, which announces Commission approval of the hyperlink requirement. Notice to Members 07-02 was published on January 8, 2007. II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, NASD included statements concerning the purpose of and basis for the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. NASD has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose On November 9, 2006, the SEC approved an amendment to IM-2210-4 establishing the hyperlink requirement. 7 On January 8, 2007, NASD published Notice to Members 07-02, which announced the Commission's approval of the hyperlink requirement and established July 7, 2007 as its implementation date. 8 Following SEC approval of the hyperlink requirement, NASD and NYSE Group, Inc. (“NYSE”) announced a plan to consolidate their member regulation operations into a combined organization that will be the sole U.S. private-sector provider of member firm regulation for securities firms that do business with the public. 9 To reflect this consolidation, NASD will be changing its name to the Financial Industry Regulatory Authority, Inc. (“FINRA”) and changing its internet domain. NASD is delaying implementation of the hyperlink requirement until its new name and internet domain are established and is providing sufficient time for firms to make the necessary changes to their Web sites. NASD will submit a separate rule change to amend IM-2210-4 to reflect its new corporate name and internet domain. 7 *See* Approval Order. 8 *See* NASD Notice to Members 07-02 (January 2007). 9 *See* SR-NASD-2007-023, which proposes to amend the By-Laws of NASD to implement governance and related changes to accommodate the consolidation of the member firm regulatory functions of NASD and NYSE Regulation, Inc., Securities Exchange Act Release No. 55495 (March 20, 2007), 72 FR 14149 (March 26, 2007). NASD has filed the proposed rule change for immediate effectiveness to immediately postpone, until October 31, 2007, the implementation date of the hyperlink requirement, which otherwise would have been implemented on July 7, 2007. 2. Statutory Basis NASD believes that the proposed rule change is consistent with the provisions of section 15A(b)(6) of the Act, 10 which requires, among other things, that NASD's rules must be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and, in general, to protect investors and the public interest. NASD is delaying implementation of the hyperlink requirement until its new name and internet domain are established and is providing sufficient time for firms to make the necessary changes to their Web sites. 10 15 U.S.C. 78o-3(b)(6). B. Self-Regulatory Organization's Statement on Burden on Competition NASD does not believe that the proposed rule change will result in any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others Written comments were neither solicited nor received. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action The foregoing proposal has become effective pursuant to section 19(b)(3)(A)(i) of the Act, 11 and Rule 19b-4(f)(1) 12 thereunder, in that it constitutes a stated policy with respect to the enforcement of an existing rule. At any time within 60 days of the filing of the proposed rule change, the Commission may summarily abrogate such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. 13 11 15 U.S.C. 78s(b)(3)(A)(i). 12 17 CFR 240.19b-4(f)(1). 13 15. U.S.C. 78s(b)(3)(C). For purposes of calculating the 60-day period within which the Commission may abrogate the proposal, the Commission considers the period to commence on July 20, 2007, the date on which NASD filed Amendment No. 1. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change 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 *rule-comments@sec.gov* . Please include File Number SR-NASD-2007-042 on the subject line. Paper Comments • Send paper comments in triplicate to Nancy M. Morris, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090. All submissions should refer to File Number SR-NASD-2007-042. 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, 100 F. Street, NE., Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. Copies of such filing also will be available for inspection and copying at the principal office of NASD. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-NASD-2007-042 and should be submitted on or before August 22, 2007. 14 17 CFR 200.30-3(a)(12). For the Commission, by the Division of Market Regulation, pursuant to delegated authority. 14 Florence E. Harmon, Deputy Secretary. [FR Doc. E7-14834 Filed 7-31-07; 8:45 am] BILLING CODE 8010-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-56147; File No. SR-NASD-2007-054] Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; Notice of Filing and Order Granting Accelerated Approval of Proposed Rule Change To Incorporate Certain NYSE Rules Relating to Member Firm Conduct July 26, 2007. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”) 1 and Rule 19b-4 thereunder, 2 notice is hereby given that on July 24, 2007, the National Association of Securities Dealers, Inc. (“NASD”) filed with the Securities and Exchange Commission (“SEC” or “Commission”) the proposed rule change to incorporate into its rulebook certain rules of the New York Stock Exchange LLC (“NYSE”) relating to the regulation of member firm conduct (“Incorporated NYSE Rules”) as described in Items I and II below, which Items have been substantially prepared by NASD. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons and is simultaneously approving the proposal on an accelerated basis. 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b-4. I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change In connection with the proposed transaction to combine the member regulation operations of NASD and NYSE into a single organization (“Transaction”), NASD proposes to add the Incorporated NYSE Rules to its rules. As discussed below, the Incorporated NYSE Rules will apply solely to members of the Financial Industry Regulatory Authority, Inc. (“FINRA”) 3 that also are members of NYSE (“Dual Members”) on or after the date of closing (“Closing”) of the Transaction. The text of the proposed rule change, including the list of the Incorporated NYSE Rules, is available at NASD, the Commission's Public Reference Room, and *http://nasd.complinet.com.* 3 In connection with the Transaction, NASD will change its corporate name to FINRA as of the date of closing of the Transaction (“Closing”). *See* Securities Exchange Act Release No. 56146 (July 26, 2007) (changing the name of NASD to FINRA in the Restated Certificate of Incorporation). II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, NASD included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item III below. NASD has prepared summaries, set forth in Sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose Currently, both NASD and NYSE Regulation, Inc. (“NYSE Regulation”) 4 oversee the activities of U.S.-based broker-dealers doing business with the public, approximately 170 of which are regulated by both organizations. According to NASD, the result is a duplicative, sometimes conflicting system that makes inefficient use of resources and, as such, can be detrimental to the ultimate goal of investor protection. 4 NYSE Regulation is a wholly-owned subsidiary of NYSE. NASD states that it has long supported the adoption of a hybrid model of self-regulation, with one self-regulatory organization (“SRO”) having responsibility for all member firm regulation. 5 NASD further notes that, at the same time, the Commission, Congress, securities firms and independent observers have long encouraged greater efficiencies, clarity and cost savings in the regulation of the U.S. financial markets. 5 *See* NASD comment letter dated March 15, 2005 in response to the SEC's Concept Release Concerning Self-Regulation, Securities Exchange Act Release No. 50700 (November 18, 2004), 69 FR 71256 (December 8, 2004) (File No. S7-40-04). With these goals in mind, on November 28, 2006, NASD and the NYSE Group, Inc. (“NYSE Group”) announced a plan to consolidate their member regulation operations into a combined organization that will be the sole U.S. private-sector provider of member firm regulation for securities firms that conduct business with the public. 6 This consolidation is intended to streamline the broker-dealer regulatory system, combine technologies, and permit the establishment of a single set of rules and group examiners with complementary areas of expertise in a single organization—all of which will serve to enhance oversight of U.S. securities firms and help ensure investor protection. Moreover, NASD notes that the new organization will be committed to reducing regulatory costs and burdens for firms of all sizes through greater regulatory efficiency. 6 Today, the Commission approved the amendments to the NASD's By-Laws proposed in connection with the Transaction. Securities Exchange Act Release No. 56145 (July 26, 2007). Incorporation of NYSE Conduct Rules—General NASD represents that FINRA will work expeditiously to consolidate the rules that apply to its member firms, reducing to one the two sets of rules currently applicable to Dual Members. During an interim period, however, until the approval of a consolidated rulebook, NASD is proposing to incorporate into FINRA's rulebook the Incorporated NYSE Rules. 7 The Incorporated NYSE Rules will apply solely to Dual Members until such time as FINRA adopts, subject to Commission approval, consolidated rules applicable to all of its members. 8 7 The text of the Incorporated NYSE Rules, as of the effective date of the proposed rule change, will be available on the FINRA Web site. To the extent the Commission has approved an amendment to an Incorporated NYSE Rule that has not yet become effective prior to the closing of the Transaction, NASD is proposing to incorporate any such amendment into FINRA's rulebook (with such amendment becoming effective upon its scheduled effective date). In the event the NYSE were to file a proposed rule change to amend an NYSE rule relating to member firm conduct following the closing of the Transaction, NASD is not proposing to incorporate any such amendment into FINRA's rulebook, absent a separate rule filing by FINRA to adopt conforming changes. 8 The Incorporated NYSE Rules would continue to apply to the same categories of persons to which they currently apply. In other words, in addition to applying to Dual Members, the Incorporated NYSE Rules would apply to persons affiliated with those firms to the same extent and in the same manner that the Incorporated NYSE Rules currently apply. NASD stated that it expects FINRA to submit to the Commission within one year of the date of Closing proposed rule changes that would constitute a significant portion of a harmonized rulebook, with the remaining rules being submitted to the Commission within two years of the Closing. *See* Letter from T. Grant Callery, Executive Vice President and General Counsel, NASD to Nancy M. Morris, Secretary, Commission, dated July 16, 2007. The proposed rule change would incorporate those NYSE rules pertaining to the regulation of member firm conduct. 9 In applying the Incorporated NYSE Rules to Dual Members, FINRA also would incorporate the related interpretative positions set forth in the NYSE Rule Interpretations Handbook and NYSE Information Memos. 9 To the extent an Incorporated NYSE Rule includes a reference to NYSE or the Exchange, such terms will be construed to mean FINRA, unless the context otherwise requires. Importantly, under the proposed rule change, there would be no new rule requirements placed on member firms as a result of the Transaction. Until the adoption of a consolidated rulebook by FINRA, those members that are NASD-only members as of the date of the Closing would continue to comply with NASD (and not NYSE) rules; those members that were Dual Members as of the date of Closing would continue to be subject to NASD and NYSE rules; and NYSE members that were not also members of NASD as of the date of Closing (“NYSE-only members”) would continue to comply with NYSE (and not NASD) rules, provided that any such NYSE-only member does not engage in any activities that would require it to be an NASD member, in which case the NYSE-only member would be subject to both NYSE and NASD rules. 10 In short, the proposed rule change is designed to ensure that all firms, whether Dual Members or members of only NYSE or NASD, will have the same set of regulatory obligations immediately following the Closing of the Transaction that those firms had prior to the Closing of the Transaction. 10 NASD anticipates NYSE's filing a proposed rule change to require its members to be members of FINRA, and expects to file a separate rule change to establish a waive-in application process for the NYSE-only members. These NYSE-only members will be subject to FINRA's By-Laws and Schedules to the By-Laws, including Schedule A (Assessments and Fees), as well as the NASD Rule 8000 Series (Investigations and Sanctions) and Rule 9000 Series (Code of Procedure). Because NYSE Group would maintain the functions it currently carries out with respect to market operations, including market surveillance functions, the proposed rule change would not incorporate NYSE rules in such areas as market regulation, including those rules addressing NYSE's Order Tracking System (“OTS”) and listing standards. The proposed rule change also would not incorporate NYSE's proxy rules. Further, the proposed rule change would not incorporate NYSE arbitration rules, as FINRA would operate its arbitration and mediation forums pursuant to the NASD Code of Arbitration Procedure. 11 11 NYSE recently filed a proposed rule change to provide guidance regarding new and pending arbitration claims in light of the consolidation of NYSE Regulation's arbitration department with that of NASD Dispute Resolution, Inc. *See* Securities Exchange Act Release No. 56015 (July 5, 2007), 72 FR 37811 (July 11, 2007) (Notice of Filing of Proposed Rule Change and Amendment No. 1) (SR-NYSE-2007-48). Disciplinary Matters Because FINRA would conduct its disciplinary proceedings in accordance with the NASD Code of Procedure, the proposed rule change would not incorporate the NYSE disciplinary rules. With respect to any disciplinary investigations pending at NYSE Regulation as of the Transaction's Closing date that pertain to the Incorporated NYSE Rules, the applicable rules and forum would depend on whether NYSE Regulation has filed a Charge Memorandum or Stipulation of Facts and Consent to Penalty (“Stipulation and Consent”) as of the date of Closing. In the event NYSE Regulation has filed a Charge Memorandum or Stipulation and Consent as of the date of Closing, the matter (including any later appeals) would be adjudicated in accordance with the NYSE disciplinary rules and before the NYSE Hearing Board. Similarly, to the extent an NYSE Hearing Board decision remains subject to appeal as of the date of Closing, any such appeal would be addressed pursuant to the NYSE disciplinary rules. 12 12 *See* SR-NYSE-2007-69 (Information Memo to NYSE members reflecting changes to disciplinary proceedings at NYSE Regulation as a result of the Transaction). In contrast, if as of the date of Closing, NYSE Regulation has not filed a Charge Memorandum or Stipulation and Consent in an investigation relating to the Incorporated NYSE Rules, the matter (including any later appeals) would be adjudicated by FINRA, pursuant to the FINRA Code of Procedure, which includes the Acceptance, Waiver and Consent process pursuant to the FINRA Code of Procedure. 13 13 Under the proposed rule change, FINRA would incorporate NYSE Rule 477 (Retention of Jurisdiction-Failure to Cooperate) with respect to matters relating to potential violations of the Incorporated NYSE Rules. NYSE Rule 477 governs, among other things, NYSE's retention of jurisdiction over certain persons for purposes of initiating disciplinary actions. The rule generally provides that NYSE shall retain jurisdiction over such persons if, prior to termination, or within one year following receipt by NYSE of written notice of the termination, of a person's status as a member, member organization, allied member, approved person or registered or non-registered employee of a member or member organization, NYSE serves written notice on such person that it is making inquiry into matters occurring prior to the termination of such person's status. Regarding summary proceedings currently adjudicated pursuant to NYSE Rule 475, the applicable rule and forum would depend on whether NYSE Regulation has notified the person or entity in writing of the summary action before the Closing date. If the notification in writing has occurred before the Closing date, then the matter would be adjudicated pursuant to NYSE disciplinary rules. If no such notification has occurred, the matter would be addressed by FINRA, pursuant to FINRA rules. Finally, with regard to fines imposed pursuant to NYSE Rule 476A (Imposition of Fines for Minor Violation(s) of Rules) (or summary fines), if a summary fine notice is issued before the date of Closing, the matter would be handled pursuant to NYSE rules. With respect to matters arising after the date of Closing, NASD expects to file with the Commission a proposed rule change to modify its Minor Rule Violation Plan (“MRVP”) to include the Incorporated NYSE Rules that, as of the date of such filing, are enumerated in NYSE's MRVP. Thus, NASD states that after the date of Closing, if the Commission were to approve the proposed rule changes, FINRA would be authorized to impose fines under NASD's MRVP for minor violations by Dual Members of the NYSE rules that are set forth in FINRA's MRVP. Non-Exclusive Common Rules As further detailed in the Agreement between NASD, NYSE, and NYSE Regulation pursuant to Rule 17d-2 under the Act 14 (“Rule 17d-2 Agreement”), certain of the Incorporated NYSE Rules have been designated “Non-Exclusive Common Rules” for which both FINRA and NYSE will bear responsibility when performing their respective regulatory responsibilities. To the extent a Non-Exclusive Common Rule pertains to matters other than member firm regulation as set forth in the Rule 17d-2 Agreement, the potential violation of such a rule would continue to be adjudicated by NYSE Regulation, in accordance with NYSE disciplinary rules. In addition, NYSE Regulation would retain sole authority to investigate and prosecute any violations of the NYSE rules that are not Incorporated NYSE Rules. 14 17 CFR 240.17d-2. The effective date of the proposed rule change will be the Closing date of the Transaction. The proposed rule change will not become effective if the Transaction does not close. 2. Statutory Basis NASD believes that the proposed rule change is consistent with the provisions of Section 15A of the Act, 15 including Section 15A(b)(2) of the Act, 16 in that it will permit FINRA to carry out the purposes of the Act, to comply with the Act and to enforce compliance by FINRA members and persons associated with members with the Act, the rules and regulations thereunder and FINRA rules. NASD further believes that the proposed rule change is consistent with the provisions of Section 15A(b)(6) of the Act, 17 which requires, among other things, that FINRA rules be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and, in general, to protect investors and the public interest. As a result of the proposed rule change, firms that currently are regulated by both NASD and NYSE Regulation will continue to comply with the same set of rules applicable to their operations, with minimal disruption to the businesses. FINRA will work expeditiously to consolidate the rules applicable to such members, so that they are required to comply with only one set of rules. 15 15 U.S.C. 78o-3. 16 15 U.S.C. 78o-3(b)(2). 17 15 U.S.C. 78o-3(b)(6). B. Self-Regulatory Organization's Statement on Burden on Competition NASD does not believe that the proposed rule change will result in any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others Written comments were neither solicited nor received. III. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change 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 *rule-comments@sec.gov.* Please include File Number SR-NASD-2007-054 on the subject line. Paper Comments • Send paper comments in triplicate to Nancy M. Morris, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090. All submissions should refer to File Number SR-NASD-2007-054. 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, 100 F Street, NE., Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. Copies of such filing also will be available for inspection and copying at the principal office of NASD. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-NASD-2007-054 and should be submitted on or before August 22, 2007. IV. Commission Findings After careful consideration, the Commission finds that the proposed rule change is consistent with the Act and the rules and regulations thereunder applicable to a national securities association. 18 Specifically, the Commission finds that the proposal is consistent with Section 15A(b)(6) of the Act 19 in that it is designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and, in general, to protect investors and the public interest. The Commission also finds that the proposed rule change is consistent with Section 15A(b)(2) of the Act 20 in that it will permit FINRA to be so organized to carry out the purposes of the Act, to comply with the Act and to enforce compliance by FINRA members and persons associated with members with the Act, the rules and regulations thereunder, and FINRA rules. 18 In approving this proposed rule change, the Commission has considered the proposed rule's impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f). 19 15 U.S.C. 78 *o* -3(b)(6). 20 15 U.S.C. 78 *o* -3(b)(2). As a result of the proposed rule change, firms that currently are regulated by both NASD and NYSE will continue to comply with the same member conduct rules following the Transaction until the member conduct rules of the NASD and NYSE Regulation are consolidated into a single set of FINRA rules. NASD represents that FINRA will work expeditiously to consolidate the rules applicable to Dual Members. 21 In the Commission's view, the proposed rule change is an important step in the process of consolidating the member firm regulatory functions of the NASD and NYSE. This regulatory consolidation is intended, among other things, to increase efficient, effective, and consistent regulation of securities firms, provide cost savings to securities firms of all sizes, and strengthen investor protection and market integrity. 21 *See supra* note 8. The Commission notes that the Incorporated NYSE Rules will be subject to the Rule 17d-2 Agreement in which the regulatory responsibility for these rules will be allocated to FINRA, although specified Non-Exclusive Common Rules as set forth in the Rule 17d-2 Agreement also would continue to be adjudicated by NYSE in accordance with NYSE disciplinary rules. 22 The proposed rule change also provides clarity with respect to the handling of disciplinary proceedings and summary proceedings initiated by NYSE prior to the date of Closing. 22 The Commission declared the Rule 17d-2 Agreement effective today. *See* Securities and Exchange Act Release No. 56148 (July 26, 2007). The Commission finds good cause to approve the proposed rule change prior to the thirtieth day after the proposal was published for comment in the **Federal Register** . Accelerating approval of the proposed rule change facilitates the proposed consolidation of NASD and NYSE's regulatory functions without delay. No changes are being made to the Incorporated NYSE Rules aside from their placement in FINRA's rulebook and no changes are being made to the class of members to which the Incorporated NYSE Rules apply. As NASD noted, the proposed rule change is designed to ensure that all firms, whether Dual Members, NYSE-only members, or NASD-only members, will have the same set of regulatory obligations immediately following the Closing of the Transaction that such firms had prior to the Closing of the Transaction. In addition, the Commission finds good cause to approve the proposal that any disciplinary matter in which a Charge Memorandum or Stipulation and Consent is filed after the date of Closing would be adjudicated pursuant to the FINRA Code of Procedure and that any summary proceeding in which the person or entity is notified in writing after the date of Closing, would be adjudicated pursuant to FINRA rules. This proposal reflects the fact that as of the date of Closing, FINRA will be responsible, under the Rule 17d-2 Agreement, for conducting disciplinary proceedings involving violations of FINRA's rules, including the Incorporated NYSE Rules, by Dual Members. Dual Members are already familiar with, and subject to, the NASD Code of Procedure, which is the FINRA Code of Procedure, and NASD rules, which are FINRA rules. While there are some distinctions between NASD's and NYSE's rules, both sets of rules applicable to the disciplinary process were previously approved by the Commission as consistent with the Act, generally following full notice and comment. Accordingly, although Dual Members and their associated persons no longer would be subject to NYSE's disciplinary procedures, but to FINRA's instead, the Commission finds good cause, consistent with Section 19(b)(2) of the Act, 23 to grant accelerated approval to the proposed rule change. 23 15 U.S.C. 78s(b)(2). V. Conclusion *It is therefore ordered,* pursuant to Section 19(b)(2) of the Act, that the proposed rule change (SR-NASD-2007-054) is hereby approved on an accelerated basis. 24 24 15 U.S.C. 78s(b)(2). By the Commission. Nancy M. Morris, Secretary. [FR Doc. E7-14854 Filed 7-31-07; 8:45 am] BILLING CODE 8010-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-56145; File No. SR-NASD-2007-023] Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; Order Approving Proposed Rule Change To Amend the By-Laws of NASD To Implement Governance and Related Changes To Accommodate the Consolidation of the Member Firm Regulatory Functions of NASD and NYSE Regulation, Inc. July 26, 2007. I. Introduction On March 19, 2007, the National Association of Securities Dealers, Inc. (“NASD”) filed with the Securities and Exchange Commission (“Commission” or “SEC”) pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (“Exchange Act”) 1 and Rule 19b-4 thereunder, 2 a proposed rule change to amend the By-Laws of NASD (“NASD By-Laws”) to implement governance and related changes to accommodate the consolidation of the member firm regulatory functions of NASD and NYSE Regulation, Inc. (“NYSE Regulation”), a wholly-owned subsidiary of New York Stock Exchange LLC (“NYSE LLC”). The proposed rule change was published for comment in the **Federal Register** on March 26, 2007. 3 The Commission received 80 comment letters from 72 commenters on the proposed rule change. 4 The NASD filed a response to comments on May 29, 2007 and a supplemental response to comments on July 16, 2007. 5 This order approves the proposed rule change. 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b-4. 3 *See* Securities Exchange Act Release No. 55495 (March 20, 2007), 72 FR 14149 (“Notice”). 4 A list of commenters on the rule proposal, whose comments were received as of July 16, 2007, is attached as Exhibit A to this Order. The public file for the proposal, which includes comment letters received on the proposal, is located at the Commission's Public Reference Room located at 100 F Street, NE., Washington, DC 20549. The comment letters are also available on the Commission's Internet Web site ( *http://www.sec.gov/rules/sro.shtml* ). 5 *See* Letter from Patrice M. Gliniecki, Senior Vice President and Deputy General Counsel, NASD, to Nancy M. Morris, Secretary, Commission, dated May 29, 2007 (“NASD Response Letter”) and Letter from T. Grant Callery, Executive Vice President and General Counsel, NASD, to Nancy M. Morris, Secretary, Commission, dated July 16, 2007 (“NASD Supplemental Response Letter”). NASD Dispute Resolution also filed two letters in response to comments. *See* Letter from Linda D. Fienberg, President, NASD Dispute Resolution, to the Public Members of SICA, dated January 26, 2007 (“NASD Dispute Resolution Letter I”) and Letter from Linda D. Fienberg, President, NASD Dispute Resolution, to Nancy M. Morris, Secretary, Commission, dated May 29, 2007 (“NASD Dispute Resolution Letter II”). NASD submitted an opinion of counsel regarding the approval by NASD members of proposed amendments to the NASD By-Laws and the amount of the payment to NASD members under Delaware Law. *See* Letter from William J. Haubert, Richards, Layton & Finger, to Nancy M. Morris, Secretary, Commission, dated July 16, 2007 (“RLF Letter”). NASD also submitted an opinion of counsel describing generally the case law, statutory provisions, and guidance published by the Internal Revenue Service (“IRS”) relevant to the disclosure in the NASD's proxy statement to members. *See* Letter from Mario J. Verdolini, Davis Polk & Wardwell, to Nancy M. Morris, Secretary, Commission, dated July 16, 2007 (“DPW Letter”). II. Description of the Proposed Rule Change In November 2006, NASD and NYSE Group, Inc. (“NYSE Group”) 6 announced their plan to consolidate their member regulation operations into a single self-regulatory organization (“SRO”) that would provide member firm regulation for securities firms that do business with the public in the United States (“Transaction”). Pursuant to the Transaction, the member firm regulation and enforcement functions and employees from NYSE Regulation would be transferred to NASD, and NASD would adopt a new corporate name. In the proposed rule change, the NASD proposes to amend the NASD By-Laws to implement governance changes that are integral to the Transaction. The proposed rule change and this Order refer to the NASD, whose name would be changed to the Financial Industry Regulatory Authority, as the “New SRO” and the amended NASD By-Laws as the “New SRO By-Laws.” 6 NYSE Group recently combined with Euronext N.V. (“Euronext”) to form a single, publicly traded holding company named “NYSE Euronext.” NYSE Group and Euronext became separate subsidiaries of NYSE Euronext. The corporate structure for the businesses of NYSE Group (including the businesses of the NYSE LLC and NYSE Arca, Inc., a registered national securities exchange) remained unchanged following the combination. Specifically, NYSE LLC remains a wholly-owned subsidiary of NYSE Group. NYSE Market remains a wholly-owned subsidiary of the NYSE LLC and conducts NYSE LLC's business. NYSE Regulation remains a wholly-owned subsidiary of NYSE LLC and performs the regulatory responsibilities for NYSE LLC pursuant to a delegation agreement with NYSE LLC and many of the regulatory functions of NYSE Arca pursuant to a regulatory services agreement with NYSE Arca. *See* Securities Exchange Act Release No. 55293 (February 14, 2007), 72 FR 8033 (February 22, 2007). Commenters on the proposed rule change generally referred to NYSE Group as “NYSE.” The New SRO would be responsible for regulatory oversight of all securities firms that do business with the public; professional training, testing and licensing of registered persons; arbitration and mediation; market regulation by contract for The NASDAQ Stock Market, Inc., the American Stock Exchange LLC, and the International Securities Exchange, LLC; and industry utilities, such as Trade Reporting Facilities and other over-the-counter operations. NASD represents that none of NASD's current functions and activities would be eliminated as a result of the Transaction. The closing of the Transaction (“Closing”) and the consolidation of the member firm regulatory functions of the NASD and NYSE Regulation are subject to the execution of definitive agreements between NASD and NYSE Group, the Commission's approval of the proposed rule change, and certain additional regulatory approvals. 7 The effective date of the proposed rule change would be the date of the Closing. There would be a transitional period commencing on the date of the Closing and ending on the third anniversary of the date of the Closing (“Transitional Period”). 7 On March 7, 2007, NASD and NYSE Group filed notification reports with the Department of Justice and the Federal Trade Commission under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. NASD represented that the waiting period for such a filing expired on April 6, 2007. NASD also represented that it received a favorable ruling by the IRS that the Transaction would not affect the tax-exempt status of NASD or NASD Regulation. *See* NASD Supplemental Response Letter, *supra* note 5, at 3. A description of the most significant changes to the NASD By-Laws follows. A. Composition of the New SRO Board The proposed rule change would implement a governance structure that includes both public and industry representation, and designates certain Governor 8 positions on the New SRO Board of Governors (“New SRO Board”) to represent member firms. Members would not have the ability to elect all Governors of the New SRO Board, but would have the ability to elect Governors that are from member firms that are similar in size to their own firms. All other Governors would be appointed, as described below. All members would continue to have the ability to vote on any future amendments to the New SRO By-Laws, 9 to petition to propose amendments to the New SRO By-Laws, 10 to vote in district elections, 11 and to petition to nominate a candidate for the Governor position(s) they are entitled to elect. 12 8 A “Governor” is a member of the Board of Governors of the New SRO. *See* New SRO By-Laws, Article I(q). 9 *See* New SRO By-Laws, Article XVI, Section 1. 10 *Id.* 11 *See* Article VIII of the NASD Regulation, Inc. By-Laws (“NASD Regulation By-Laws”). 12 *See* New SRO By-Laws, Article VII, Section 10. 1. Composition of New SRO Board During the Transitional Period During the Transitional Period, the New SRO Board would consist of 23 Governors as follows:

(a)Eleven Governors would be “Public Governors;” 13

(b)ten Governors would be “Industry Governors”; 14 and

(c)two Governors initially would be Richard G. Ketchum, currently Chief Executive Officer (“CEO”) of NYSE Regulation and Mary L. Schapiro, currently CEO of NASD. Mr. Ketchum would serve as Chair of the New SRO Board (“Chair”) 15 for a term of three years. 16 Ms. Schapiro would serve as CEO of the New SRO. Initially, five Public Governors would be appointed by the Board of Directors of NYSE Group (“NYSE Group Board”); five Public Governors would be appointed by the NASD Board of Governors in office prior to the Closing (“NASD Board”); and one Public Governor would be appointed jointly by the NYSE Group Board and the NASD Board (the “Joint Public Governor”). A Public Governor must not have any material business relationship with a broker or dealer or an SRO registered under the Exchange Act (other than serving as a public director of such an SRO). 17 13 A “Public Governor” means any Governor who is not the Chief Executive Officer of the New SRO or, during the Transitional Period, the CEO of NYSE Regulation, who is not an Industry Governor (as defined below) and who otherwise has no material business relationship with a broker or dealer or an SRO registered under the Exchange Act, other than as a public director of such an SRO. *See* New SRO By-Laws, Article I(tt). 14 An “Industry Governor” is the Floor Member Governor (as defined below), the Independent Dealer/Insurance Affiliate Governor (as defined below), the Investment Company Affiliate Governor (as defined below) or any other Governor (excluding the CEO of the New SRO and, during the Transitional Period, the CEO of NYSE Regulation) who:

(a)Is or has served in the prior year as an officer, director (other than as an independent director), employee or controlling person of a broker or dealer, or

(b)has a consulting or employment relationship with or provides professional services to an SRO registered under the Exchange Act, or has had any such relationship or provided any such services at any time within the prior year. *See* New SRO By-Laws, Article I(t). 15 *See infra* text accompanying notes 63 to 65 for a more detailed description of the Chair. 16 During the Transitional Period, Mr. Ketchum, the current CEO of NYSE Regulation, would serve as the Chair so long as he remains a Governor. *See* New SRO By-Laws, Article XXII, Section 2(b). 17 *See supra* note 13. The ten Industry Governors would consist of:

(a)Three Governors who are registered with members that employ 500 or more registered persons (“Large Firm Governors”);

(b)one Governor who is registered with a member that employs at least 151 and no more than 499 registered persons (“Mid-Size Firm Governor”);

(c)three Governors who are registered with members that employ at least one and no more than 150 registered persons (“Small Firm Governors” and, together with the Large Firm Governors and the Mid-Size Firm Governors, “Firm Governors”);

(d)one Governor who is associated with a floor member (or a firm in the process of becoming a floor member) of the New York Stock Exchange (“Floor Member Governor”); 18

(e)one Governor who is associated with an independent contractor financial planning member firm or an affiliate of an insurance company (“Independent Dealer/Insurance Affiliate Governor”); 19 and

(f)one Governor who is associated with an affiliate of an Investment Company (“Investment Company Affiliate Governor”). 20 During the Transitional Period, the three Small Firm Governors would be nominated by the NASD Board and elected by members that have at least one and no more than 150 registered persons, although members of that size also would have the right to nominate opposing candidates for the Small Firm Governor position. The one Mid-Size Firm Governor would be nominated jointly by the NYSE Group Board and the NASD Board and elected by members that have at least 151 and no more than 499 registered persons, although members of that size also can nominate opposing candidates for the Mid-Size Firm Governor position. The three Large Firm Governors would be nominated by the NYSE Group Board and elected by members that have 500 or more registered persons, although members of that size also can nominate opposing candidates for the Large Firm Governor position. In addition, the one Floor Member Governor would be appointed by the NYSE Group Board; the one Independent Dealer/Insurance Affiliate Governor would be appointed by the NASD Board; and the one Investment Company Affiliate Governor would be appointed jointly by the NYSE Group Board and the NASD Board. 21 18 *See* New SRO By-Laws, Article I(n). 19 *See* New SRO By-Laws, Article I(r). *See infra* text accompanying note 213 for additional discussion regarding the definition of Independent Dealer/Insurance Affiliate Governor. 20 *See* New SRO By-Laws, Article I(w). *See infra* text accompanying note 213 for additional discussion regarding the definition of Investment Company Affiliate Governor. 21 *See* New SRO By-Laws, Article XXII, Sections 3 and 4. To implement the New SRO Board structure described above, the NYSE Group Board and the NASD Board would appoint the Public Governors and Industry Governors that they, either individually or jointly, have the power to appoint, effective as of the Closing. The Public Governors, the Floor Member Governor, the Investment Company Affiliate Governor, and the Independent Dealer/Insurance Affiliate Governor would hold office for the three-year Transitional Period. The three Small Firm Governors, three Large Firm Governors, and one Mid-Size Firm Governor would be elected as Governors at the first annual meeting of members of the New SRO following the Closing, which is expected to be held within ninety days after the Closing, and would hold office until the first annual meeting of members of the New SRO following the Transitional Period. 22 During the interim period from the Closing until the first annual meeting of members, the Small Firm Governor, Large Firm Governor, and Mid-Size Firm Governor seats would be filled by three interim Industry Governors appointed by the NASD Board from industry governors currently on the NASD Board, three interim Industry Governors appointed by the NYSE Group Board, and one interim Industry Governor jointly appointed by the NYSE Group Board and the NASD Board, in each case prior to the Closing. 23 22 *Id.* 23 *See* New SRO By-Laws, Article XXII, Section 2(a). 2. Composition of the New SRO Board after the Transitional Period The composition of the New SRO Board would remain the same after the Transitional Period, except that the term of office of the CEO of NYSE Regulation as a member of the New SRO Board would automatically terminate at the end of the Transitional Period. Thus, the authorized number of members of the New SRO Board would be reduced by one. 24 Other changes after the Transitional Period are described below. 24 Under New SRO By-Laws, Article VII, Section 4 (Composition and Qualification of the Board), the total number of Governors is determined by the Board of Governors, with such number being no fewer than 16 nor more than 25 Governors. The number of Public Governors must exceed the number of Industry Governors. As a practical matter, the New SRO Board cannot have fewer than 22 Governors due to the number of designated Industry Governor positions and the requirement that the number of Public Governors must exceed the number of Industry Governors. Thus, absent the filing of a proposed rule change under Section 19(b) of the Exchange Act, there would be a minimum number of ten Industry Governors, eleven Public Governors, plus the CEO of the New SRO. *See* NASD Response Letter, *supra* note 5, at 3. As of the first annual meeting of members following the Transitional Period, the Large Firm Governors, the Mid-Size Firm Governor, and the Small Firm Governors would be divided into three classes. 25 The composition of the classes would be arranged as follows: 26 25 *See* New SRO By-Laws, Article VII, Section 5. 26 *Id.* • First class: Consisting of one Large Firm Governor and one Small Firm Governor, who would be elected for a term of office expiring at the first succeeding annual meeting of members; • Second class: Consisting of one Large Firm Governor, one Mid-Size Firm Governor, and one Small Firm Governor, who would be elected for a term of office expiring at the second succeeding annual meeting of members; and • Third class: Consisting of one Large Firm Governor and one Small Firm Governor, who would be elected for a term of office expiring at the third succeeding annual meeting of members. While these classes are designed to ensure staggered board seats, at no time would there be less than ten Industry Governor positions on the New SRO Board. At each annual election following the first annual meeting of members after the Transitional Period, Large Firm Governors, Small Firm Governors, and Mid-Size Firm Governors would be elected for a term of three years to replace those Governors whose terms have expired. 27 These Governors would serve until a successor is duly appointed and qualified, or until death, resignation, disqualification or removal. A Governor elected by the members may not serve more than two consecutive terms. 27 Governors would be elected by a plurality of the votes of the members of the New SRO present in person or represented by proxy at the annual meeting of the New SRO and entitled to vote for such category of Governors. *See* New SRO By-Laws, Article VII, Section 13. As of the first annual meeting of members following the Transitional Period, the Public Governors, the Floor Member Governor, the Independent Dealer/Insurance Affiliate Governor, and the Investment Company Affiliate Governor (“Appointed Governors”) would be divided by the New SRO Board into three classes, as equal in number as possible, with the first class holding office until the first succeeding annual meeting of members, the second class holding office until the second succeeding annual meeting of members, and the third class holding office until the third succeeding annual meeting of members. Each class would initially contain as equivalent a number as possible of Appointed Governors who were members of the New SRO Board appointed or nominated by the NYSE Group Board or are successors to such Governor positions, on the one hand, and Appointed Governors who were members of the New SRO Board appointed or nominated by the NASD Board or are successors to such Governor positions, on the other hand, to the extent the New SRO Board determines such persons are to remain Governors after the Transitional Period. At each annual election following the first annual meeting of members following the Transitional Period, Appointed Governors would be appointed by the New SRO Board for a term of three years to replace those whose terms expire. These Governors would serve until a successor is duly appointed and qualified, or until death, resignation, disqualification or removal. No Appointed Governor may serve more than two consecutive terms. 28 28 *See* New SRO By-Laws, Article VII, Section 5. B. Governor Vacancies 1. During the Transitional Period As noted above, the CEO of NYSE Regulation would be a Governor and the Chair during the Transitional Period. In the event of a vacancy in the Governor position held by Mr. Ketchum (or his successor) during the Transitional Period, the new CEO of NYSE Regulation would serve as a Governor for the remainder of the Transitional Period. If Mr. Ketchum ceases to occupy the office of Chair for any reason during the Transitional Period, then his successor as Chair would be selected by the NYSE Group Committee, 29 from among its members, with the exception that those Governors who also serve as NYSE Group directors may not become Chair nor may Mr. Ketchum's successor as CEO of NYSE Regulation become Chair. 30 29 “NYSE Group Committee” means a committee of the New SRO Board composed of the five Public Governors and the Floor Member Governor appointed as such by the Board of NYSE Group, and the Large Firm Governors which were nominated for election as such by the Board of NYSE Group, and in each case their successors. *See* New SRO By-Laws, Article I(pp). 30 *See* New SRO By-Laws, Article XXII, Section 2(b). In the event of any vacancy among the Large Firm Governors, the Mid-Size Firm Governor, or the Small Firm Governors during the Transitional Period,

(a)Such vacancy would be filled, and nominations for persons to fill such vacancy would be made, by the NYSE Group Committee in the case of a Large Firm Governor vacancy;

(b)such vacancy would be filled by the Board, and nominations for persons to fill such vacancy would be made by the New SRO's Nominating Committee in the case of a Mid-Size Firm Governor vacancy; and

(c)such vacancy would be filled, and nominations for persons to fill such vacancy would be made by the NASD Group Committee 31 in the case of a Small Firm Governor vacancy. 32 In the event the remaining term of office of any such Governor is more than twelve months, nominations would be made as set forth above, but such vacancy would be filled by the New SRO members entitled to vote on such Governor position at a meeting of members called to fill the vacancy. 33 31 “NASD Group Committee” means a committee of the New SRO Board composed of the five Public Governors and the Independent Dealer/Insurance Affiliate Governor appointed as such by the NASD Board in office prior to the Closing, and the Small Firm Governors which were nominated for election as such by the NASD Board in office prior to the Closing, and in each case their successors. *See* New SRO By-Laws, Article I(jj). 32 *See* New SRO By-Laws, Article XXII, Section 3. 33 *Id.* In the event of any vacancy among the Floor Member Governor, the Investment Company Affiliate Governor, or the Independent Dealer/Insurance Affiliate Governor during the Transitional Period,

(a)Such vacancy would be filled by, and nominations for persons to fill such vacancy would be made by the NYSE Group Committee in the case of a Floor Member Governor vacancy;

(b)such vacancy would be filled by the New SRO Board, and nominations for persons to fill such vacancy would be made by the New SRO's Nominating Committee in the case of an Investment Company Affiliate Governor vacancy; or

(c)such vacancy would be filled by, and nominations for persons to fill such vacancy would be made by, the NASD Group Committee in the case of an Independent Dealer/Insurance Affiliate Governor vacancy. 34 34 *Id.* In the event of any vacancy among those Public Governors appointed by the NYSE Group Board (or their successors), such vacancy would be filled by, and nominations for persons to fill such vacancy would be made by, the NYSE Group Committee. In the event of any vacancy among those Public Governors appointed by the NASD Board (or their successors), such vacancy would be filled by, and nominations for persons to fill such vacancy would be made by, the NASD Group Committee. In the event of any vacancy of the Public Governor position jointly appointed by the NYSE Group Board and the NASD Board (or their successors), such vacancy would be filled by the New SRO Board, and nominations for persons to fill such vacancy would be made by the New SRO's Nominating Committee. 35 35 *Id.* 2. After the Transitional Period In the event of any vacancy among the Large Firm Governors, the Mid-Size Firm Governor, or the Small Firm Governors, such vacancy would be filled by the Large Firm Governor Committee 36 in the case of a Large Firm Governor vacancy, the New SRO Board in the case of a Mid-Size Firm Governor vacancy, or the Small Firm Governor Committee 37 in the case of a Small Firm Governor vacancy; provided, however, that in the event the remaining term of office of any Large Firm, Mid-Size Firm, or Small Firm Governor position becomes vacant for more than twelve months, such vacancy would be filled by the members of the New SRO entitled to vote thereon at a meeting thereof convened to vote thereon. 38 Whether a vacancy is filled by the appropriate committee for a position that is vacant for twelve months or less or by election if the vacancy is greater than twelve months, nominations would be made by the Nominating Committee as described below. 39 36 “Large Firm Governor Committee” means a committee of the Board composed of all of the Large Firm Governors. *See* New SRO By-Laws, Article I(aa). 37 “Small Firm Governor Committee” means a committee of the Board composed of all the Small Firm Governors. *See* New SRO By-Laws, Article I(yy). 38 If a Governor is appointed to fill a vacancy of an elected Governor position for a term of less than one year, the Governor may serve up to two consecutive terms following the expiration of the Governor's initial terms. *See* New SRO By-Laws, Article VII, Section 5. 39 *See* New SRO By-Laws, Article VII, Sections 5 and 9. In the event of any vacancy among the Public Governors or among the Floor Member Governor, the Investment Company Affiliate Governor, or the Independent Dealer/Insurance Affiliate Governor after the Transitional Period, such vacancies would be filled by the New SRO Board from candidates recommended to the Board by the Nominating Committee. 40 40 *Id.* If a Governor is appointed to fill the vacancy of an Appointed Governor position for a term of less than one year, the Governor may serve up to two consecutive terms following the expiration of the Governor's initial terms. *See* New SRO By-Laws, Article VII, Section 5. C. Committees of the New SRO Board 1. Committees Generally a. *During the Transitional Period.* During the Transitional Period, the New SRO is required to have the following committees of the Board 41 : The NASD Group Committee; the NYSE Group Committee; the Small Firm Governor Committee, and the Large Firm Governor Committee. The New SRO also is required to have an Audit, 42 Finance, 43 and Nominating Committees and, during the first year of the Transitional Period, or as may be extended thereafter by the Board, an Integration Committee. 44 In addition, the New SRO would have an Investment Committee, which would not be a committee of the Board. 45 41 *See* New SRO By-Laws, Article IX, Section 1(a). These committees play a role in the filling of vacancies on the Board and appointing the Chair of the Board of the New SRO. *See* New SRO By-Laws, Article XXII, Section 3. 42 The Audit Committee would consist of four or five Governors, none of whom would be officers or employees of the New SRO. The Audit Committee would perform the following functions:

(i)Ensure the existence of adequate controls and the integrity of the financial reporting process of the New SRO;

(ii)recommend to the New SRO Board, and monitor the independence and performance of, the certified public accountants retained as outside auditors by the New SRO; and

(iii)direct and oversee all the activities of the New SRO's internal review function, including, but not limited to, management's responses to the internal review function. *See* New SRO By-Laws, Article IX, Section 5. 43 The Finance Committee would consist of four or more Governors, including the CEO of the New SRO. A Finance Committee member would hold office for a term of one year. The Finance Committee would advise the Board with respect to the oversight of the financial operations and conditions of the New SRO, including recommendations for the annual operating and capital budgets and proposed changes to the rates and fees charged by the New SRO. *See* New SRO By-Laws, Article IX, Section 6(a)-(c). 44 The Integration Committee would have a term not to exceed one year from the Closing, unless continued for a longer period by resolution of the Board. The Chair of the Board would be the Chair of the Integration Committee unless, in the case of the Integration Committee continuing beyond one year after the Closing, otherwise determined by the Board. *See* New SRO By-Laws, Article IX, Section 7. 45 The majority of the Investment Committee during the Transitional Period would be composed of members of the Investment Committee immediately prior to the Closing, unless otherwise determined by the NASD Group Committee, and a minority of the Investment Committee during the Transitional Period would be composed of members of the NYSE Group Committee. *See* New SRO By-Laws, Article IX, Section 6(d). Unless otherwise provided in the New SRO By-Laws, any other committee having the authority to exercise the powers and authority of the New SRO Board must have a number of Public Governors that is greater than the number of Industry Governors. 46 In addition, any committee of the New SRO Board having the authority to exercise the powers and authority of the Board (with the exception of the Large Firm Governor Committee, the Small Firm Governor Committee, the NASD Group Committee, and the NYSE Group Committee) also must have:

(i)A percentage of members (to the nearest whole number of committee members) that are members of the NASD Group Committee at least as great as the percentage of Governors on the Board that are members of the NASD Group Committee; and

(ii)a percentage of members (to the nearest whole number of committee members) that are members of the NYSE Group Committee at least as great as the percentage of Governors on the Board that are members of the NYSE Group Committee. 47 46 *See* New SRO By-Laws, Article IX, Section 1(b). 47 *Id* . The New SRO Board may appoint an Executive Committee which can exercise all the powers and authority of the New SRO Board in the management and affairs of the New SRO between meetings of the New SRO Board, subject to the limitations in the New SRO's Certificate of Incorporation 48 and applicable state law. 49 The Executive Committee would consist of no fewer than five and no more than eight Governors. The Executive Committee would include the CEO of the New SRO and the Chair of the New SRO Board. 50 48 NASD will be submitting a proposed rule change to amend its Certificate of Incorporation to reflect the New SRO By-Laws. 49 *See* New SRO By-Laws, Article IX, Section 4(a). 50 *See* New SRO By-Laws, Article IX, Section 4(b). b. *After the Transitional Period.* After the Transitional Period, the New SRO is required to have the following committees of the Board: The Small Firm Governor Committee and the Large Firm Governor Committee. New SRO also is required to have Audit, Finance, and Nominating Committees. The structure and composition of the Executive Committee, and any other committee having the authority to exercise the powers and authority of the Board, remains unchanged from that described above for the Transitional Period. 2. Nominating Committee The Nominating Committee would be a committee of the New SRO Board and would replace the NASD's National Nominating Committee. 51 51 *See* New SRO By-Laws, Article I(oo) and Article VII, Section 9. a. *During the Transitional Period.* For the first annual meeting following the Closing, nominations for the seven elected industry seats would not be made by the Nominating Committee. Instead, the NASD Board would make nominations for the Small Firm Governors positions, the NYSE Group Board would make nominations for the Large Firm Governors positions, and the NASD Board and NYSE Group Board jointly would make the nominations for the Mid-Size Firm Governor position. 52 In addition, prior to the Closing, the NASD Board would identify and appoint five Public Governors and the Independent Dealer/Insurance Affiliate Governor; the NYSE Group Board would identify and appoint five Public Governors and the Floor Member Governor; and the NASD Board and the NYSE Group Board would jointly identify and appoint one Public Governor and the Investment Company Affiliate Governor. 53 52 *See* New SRO By-Laws, Article XXII, Section 4. 53 *See* New SRO By-Laws, Article XXII, Section 3. During the Transitional Period, members of the Nominating Committee would be appointed jointly by the New SRO CEO and the CEO of NYSE Regulation as of Closing (or his duly appointed or elected successor as Chair of the New SRO Board), subject to ratification of the appointees by the New SRO Board. 54 The Nominating Committee would be responsible solely for nominating persons to fill vacancies in Governor positions for which the New SRO Board has the authority to fill, namely, the Mid-Size Firm Governor position, the Investment Company Affiliate Governor position, and the one Public Governor position that is initially appointed jointly by the NYSE Group Board and the NASD Board in office prior to the Closing. 55 54 *See* New SRO By-Laws, Article XXII, Section 1. 55 *See* New SRO By-Laws, Article XXII, Section 3. b. *After the Transitional Period.* Following the Transitional Period, the members of the Nominating Committee would be determined by the New SRO Board. 56 At all times, the number of Public Governors on the Nominating Committee must equal or exceed the number of Industry Governors on the Nominating Committee. 57 In addition, the Nominating Committee must at all times be composed of a number of Governors that is a minority of the entire New SRO Board. 58 The New SRO CEO may not be a member of the Nominating Committee. The Nominating Committee would be responsible for nominating persons for appointment or election to the New SRO Board, as well as nominating persons to fill vacancies in appointed or elected Governor seats. 59 56 *See* New SRO By-Laws, Article VII, Sections 9(b) and 9(c). 57 *See* New SRO By-Laws, Article VII, Section 9(b). At least 20% of the Nominating Committee is expected to be composed of Industry Governors. *See* NASD Response Letter, *supra* note 5, at 7. 58 *Id* . 59 *See* New SRO By-Laws, Article VII, Section 9(a). D. Additional Changes 1. Annual Meetings a. *During the Transitional Period* . Except for the first annual meeting following the Closing at which Large Firm Governors, the Mid-Size Firm Governor, and Small Firm Governors would be elected, there would be no annual meetings of members during the Transitional Period. 60 At such first annual meeting, Small Firm members would be entitled to vote for the election of Small Firm Governors, Mid-Size Firm members would be entitled to vote for the election of the Mid-Size Firm Governor, and Large Firm members would be entitled to vote for the election of Large Firm Governors. 61 60 *See* New SRO By-Laws, Article XXI, Section 1. 61 *Id. See also* New SRO By-Laws, Article XXII, Section 3. b. *After the Transitional Period* . An annual meeting of members of the New SRO would be held on a date and at a place as the New SRO Board designates. 62 The business of the annual meeting includes the election of the Small, Mid-Size, and Large Firm Governors of the New SRO Board. Small Firm members would be entitled to vote for the election of Small Firm Governors, Mid-Size Firm members would be entitled to vote for the election of the Mid-Size Firm Governor, and Large Firm members would be entitled to vote for the election of Large Firm Governors. 62 *Id. See also* New SRO By-Laws, Article XXI, Section 1. 2. Chair During the Transitional Period, the Chair would be the CEO of NYSE Regulation as of the Closing as long as he remains a Governor of the New SRO. 63 In the event the CEO of NYSE Regulation as of the Closing ceases to be the Chair during the Transitional Period, subject to the New SRO Certificate of Incorporation and the By-Laws, the Chair would be selected by the NYSE Group Committee from among its members, provided that the Chair so selected may not be a member of the Board of Directors of NYSE Group nor may the successor CEO of NYSE Regulation serve as Chair. 64 63 *See* New SRO By-Laws, Article XXII, Section 2(b). 64 *Id* . After the Transitional Period, the Chair would be elected by the New SRO Board from among its members. 65 65 *See* New SRO By-Laws, Article VII, Section 4(b). 3. Lead Governor The New SRO Board would have a Governor who would preside over executive sessions of the New SRO Board in the event the Chair is recused (“Lead Governor”). 66 66 *See* New SRO By-Laws, Article I(bb) and Article VII, Section 4(b). a. *During the Transitional Period* . During the Transitional Period, the Lead Governor would be selected by the New SRO Board, after consultation with the New SRO's CEO, but cannot be a member who is concurrently serving on the NYSE Group Board. 67 The New SRO Board, the CEO, the Chair, and the Lead Governor of the New SRO each would have the authority to call meetings of the New SRO Board. 68 Both the CEO and Chair, and for matters from which the CEO and Chair are recused from considering, the Lead Governor, would have the authority to place items on the New SRO Board agendas. 69 67 *See* New SRO By-Laws, Article I(bb) and Article XXII, Section 1. 68 *See* New SRO By-Laws, Article VII, Section 8. 69 *Id* . b. *After the Transitional Period* . After the Transitional Period, the New SRO Board would continue to have a Lead Governor who would preside over executive sessions of the New SRO Board in the event the Chair is not present or recused. 70 The Lead Governor would be elected by the Board but cannot be a member who is concurrently serving on the NYSE Group Board. 71 The New SRO Board, the New SRO CEO, the Chair, and the Lead Governor would have the authority to call meetings of the New SRO Board. 72 Both the New SRO CEO and the Chair, and for matters from which the New SRO CEO and the Chair are recused from considering, the Lead Governor, would have the authority to place items on the New SRO Board agenda. 73 70 *See* New SRO By-Laws, Article VII, Section 4(b). 71 *See* New SRO By-Laws, Article I(bb). 72 *See* New SRO By-Laws, Article VII, Section 8. 73 *Id* . 4. Definition of Disqualification The New SRO By-Laws also include changes or additions to certain defined terms. In addition to changes to accommodate the New SRO's new governance structure, the proposed rule change would amend the definition of “disqualification” in the NASD By-Laws to conform to the federal securities laws, such that any person subject to a statutory disqualification under the Exchange Act also would be subject to disqualification under NASD rules. 74 74 NASD represented that it will file a proposed rule change, which will be reviewed by the Commission pursuant to Section 19(b) of the Exchange Act, to address the applicable eligibility proceedings for persons subject to disqualification as a result of the proposed change in definition. *See* Notice, *supra* note 3. 5. References to the NASD In addition, NASD proposes other technical changes to its By-Laws. For example, each reference to “NASD” in the NASD By-Laws would be replaced with “Corporation” in contemplation of the change in the name of the Corporation. In addition, each reference to the “Rules of the Association” in the NASD By-Laws would be replaced with “Rules of the Corporation.” 6. Proposed Changes to NASD Regulation By-Laws In 2000, NASD created a subsidiary for its mediation and arbitration functions, NASD Dispute Resolution, pursuant to the Plan of Allocation and Delegation of Functions by NASD to Subsidiaries (“Delegation Plan”). NASD proposes to make limited conforming changes to the NASD Regulation By-Laws solely to reflect the proposed governance structure of the New SRO Board. First, in light of the new proposed composition of the New SRO Board, the proposed rule change would amend Section 5.2 of the NASD Regulation By-Laws (Number of Members and Qualifications of the National Adjudicatory Council (“NAC”)) to eliminate the reference that the Chairman of the NAC would serve as a Governor of the NASD Board for a one-year term. Second, because the Chairman of the NAC may continue to serve as a Director of the NASD Regulation Board, the proposed rule change would eliminate the requirement in Section 4.3 of the NASD Regulation By-Laws (Qualifications) that only Governors of the NASD Board are eligible for election to the NASD Regulation Board. Finally, NASD proposes to amend the statement in Section 4.3 of the NASD Regulation By-Laws that provides that the CEO of NASD would be an ex-officio non-voting member of the NASD Regulation Board, to reflect that Ms. Schapiro would occupy both the position of CEO of the New SRO and the President of NASD Regulation. In particular, the proposed rule change would clarify that where the CEO of the New SRO also serves as President of NASD Regulation, then the person would have all powers, including voting powers, granted to all other Directors of NASD Regulation pursuant to applicable law, the Certificate of Incorporation of NASD Regulation, the Delegation Plan, and the NASD Regulation By-Laws. III. Summary of Comments on the Proposal The Commission received a total of 80 comment letters from 72 commenters on the proposal. 75 Seventeen commenters supported the proposed New SRO By-Laws, 76 some of whom believed that the consolidation proposal would streamline regulation and simplify compliance with a uniform set of regulations. 77 Forty-four commenters urged the Commission not to approve the proposal, generally arguing that the proposed New SRO By-Laws do not protect investors or provide enough representation for industry members or smaller member firms. 78 Three commenters supported the consolidation but opposed the New SRO By-Laws primarily because of the member voting provisions. 79 Other commenters were concerned about the fairness and independence of the arbitration process and the loss of an arbitration forum resulting from the consolidation which would allocate sole responsibility for arbitration and mediation to the New SRO. 80 One commenter provided copies of an amended complaint and an order relating to a lawsuit filed by an NASD member firm against NASD, NYSE Group and certain NASD officers. 81 Four commenters raised additional issues relating to the proposed rule change. 82 The commenters generally addressed issues falling into one or more of the categories discussed below. 75 Exhibit A to this Order contains a list of comment letters received by the Commission on the proposal as of July 16, 2007, including the citations to the comment letters referenced in this Order. 76 *See* Vanguard Letter, Kirk Letter, SIFMA Letter, Casady Letter, Moloney Letter, Stringer Letter, Alsover Letter, Johnstone Letter, Castiglioni Letter, Robertson Letter, Pictor Letter, NAIBD Letter, FSI Letter, Bakerink Letter, NSCP Letter, Mungenast Letter, and NASAA Letter. 77 *See* Vanguard Letter, SIFMA Letter, Castiglioni Letter, FSI Letter, NSCP Letter, and Bakerink Letter. 78 *See* Mortarotti Letter, Lek Letter, Darcy Letter, Jordan Letter, Blumenschein Letter, Kosinsky Letter, Roberts Letter, Botzum Letter, Busacca Letter, RKeenan Letters I & II, King Letter, Flater Letter, Hebert Letter, Schunk Letter, Arnold Letter, High Letter, Eitel Letters I & II, Cohen Letter, Vande Weerd Letter, Jester Letters I & II, Schultz Letter, Benchmark Letter, Benchmark/Standard Letter I, de Leeuw Letter, Elish Letter, Hanson Letter, Horney Letter, Mayfield Letter, Solomon Letter, Patterson Letter, Daily Letter, Cray Letter, Biddick Letter, Penrod Letter, Spindel Letter, Isolano Letter, Lundgren Letters I & II, Haney Letter, Schooler Letter, Callaway Letter, John Q Letter, Miller Letters, JKeenan Letter, and Massachusetts Letter. 79 *See* Kramer Letter, IASBDA Letter, and Wachtel Letter. 80 *See* *e.g.* , Public Members of SICA Letter, Greenberg Letters I & II, and Caruso Letter. One commenter who objected to the consolidation also argued that investor rights would be reduced by cutting the number of arbitration venues in half. *See* Lundgren Letter I. As discussed below, NASD Dispute Resolution responded directly to one commenter. *See* NASD Dispute Resolution Letter I, *supra* note 5. 81 *See* Johnny Q Member Letters I & II. The Commission also received a letter on behalf of Benchmark Financial Services, Inc. (“Benchmark”) and Standard Investment Chartered, Inc. (“Standard”), forwarding certain documents and pleadings relating to the lawsuit filed by Standard against the NASD, the NYSE, and three individuals defendants (Mary L. Schapiro, NASD's CEO; Richard F. Brueckner, Presiding Governor of the NASD Board of Governors; and Barbara Z. Sweeney, NASD's Senior Vice President and Corporate Secretary) (collectively, with NASD and NYSE, the “Defendants”) in the U.S. District Court for the Southern District of New York (“Standard Lawsuit”). *See* Benchmark/Standard Letter I. The Court recently granted the Defendants' motion to dismiss, finding that Standard had failed to exhaust its administrative remedies. *See Standard Investment Chartered, Inc.* v. *National Association of Securities Dealers, Inc.* , No. 07-CV-2014 (S.D.N.Y.), 2007 WL 1296712 (May 2, 2007). On July 13, 2007, the Court denied Standard's motion for reconsideration. *See Standard Investment Chartered, Inc.* v. *National Association of Securities Dealers, Inc.* , No. 07-CV-2014 (S.D.N.Y.) (July 13, 2007) (denying Plaintiff's Motion for Reconsideration of the Court's May 2, 2007 Opinion and Order). Standard's complaint alleged seven state law claims:

(1)That the individual Defendants breached fiduciary duties to the proposed class in negotiating the proposed Transaction and failing to disclose all material facts in the proxy statement;

(2)that the Defendants engaged in negligent misrepresentation with respect to the proxy statement;

(3)that the NYSE and the individual Defendants will be unjustly enriched by the Transaction;

(4)that NASD members have been denied their right to elect Governors of the NASD in violation of Section 211 of the Delaware General Corporation Law, 8 Del. C. section 211(a);

(5)that the Defendants have improperly converted or, if the Transaction is effected, will have taken the prospective class members' assets and/or “Member's Equity”;

(6)that the Defendants have caused a substantial diminution in the value of NASD membership, with imminent completion of such diminution; and

(7)that the Defendants have deprived the prospective class members of their voting membership. 82 *See* Harriman-Thiessen Letter (requesting that the Commission determine why NASD member firms voted the way they did), Judith Schapiro Letter ( *see* text accompanying *infra* note 105), Schriner Letter (not opposed to reducing regulatory redundancies but believes that the proposed combination does not satisfy standards of “just and equitable principles of fair trade”), and Hawks Letter ( *see infra* note 88). A. Fair Representation 1. Classification of Member Governors Some commenters argued that the New SRO should retain the NASD's current “one firm, one vote” election process, whereby each NASD member is currently entitled to vote for the election of all NASD Governors (other than the CEO of NASD, the President of NASD Regulation, the Chair of the NAC, and, if applicable, a second officer of NASD). 83 In this regard, several commenters argued that the proposal would dilute the voting rights of members in New SRO Board elections, particularly with respect to small member firms. 84 These commenters also expressed concern that the New SRO By-Laws would result in the New SRO's Board being dominated by the large firms at the expense of the views and concerns of the small firms. 83 *See* Lek Letter, Kosinsky Letter, Roberts Letter, RKeenan Letter II, Miller Letters, Blumenschein Letter, Eitel Letter II, de Leeuw Letter, Elish Letter, Patterson Letter, Callaway Letter, Isolano Letter, Hebert Letter, Biddick Letter, John Q Letter, and Schriner Letter. 84 *See* Mortarotti Letter, Jordan Letter, Roberts Letter, Botzum Letter, Arnold Letter, High Letter, Eitel Letter I, Cohen Letter, JKeenan Letter, Schultz Letter, Benchmark Letter, Benchmark/Standard Letter I (adding Standard to the Benchmark Letter to be an additional objector), Solomon Letter, Isolano Letter, Haney Letter, Callaway Letter, Cray Letter, Blumenschein Letter, Biddick Letter, and Wachtel Letter. One commenter stated that there has been insufficient review to address the concerns of small independent broker-dealers. 85 One commenter maintained that the current NASD By-Laws state that firms, not the number of representatives or revenues collected, dictate the “one firm, one vote rule.” 86 Other commenters argued that the proposal is designed to prevent the voices of the small member firms from being heard 87 or to eliminate small firms by escalating the cost of doing business. 88 Commenters also believed that there is no rational connection between the “one firm, one vote” policy and the consolidation of regulatory rules and procedures, arguing that “the NASD Board has used this regulatory consolidation * * * as a means of consolidating its power and, in turn, limiting the power of an institution that has wholly democratic origins.” 89 85 *See* Horney Letter. 86 *See* Blumenschein Letter. 87 *See* Callaway Letter. 88 *See* Haney Letter (defining “small” firms as those firms with one to ten representatives). Four commenters were concerned about burdensome regulation of small broker-dealers generally. *See* Penrod Letter (stating that small broker-dealers might be better off forming another organization designed for small broker-dealers), Hawks Letter, Roberts Letter, and Callaway Letter. 89 *See* Benchmark Letter and Benchmark/Standard Letter I (adding Standard to the Benchmark Letter to be an additional objector). The Benchmark Letter also noted that it does not dispute that the regulatory consolidation has some merit. *See also* Busacca Letter (arguing that there was no specific reason given by the NASD or NYSE for “member firms * * * surrender[ing] their right to vote for their Board of Governors”). The FSI, along with two other commenters, expressly supported the proposed New SRO By-Laws, noting that the New SRO By-Laws would provide for effective, diverse representation of all members of the securities industry on the New SRO Board. 90 These commenters believed that the proposal is a reasonable way to maintain proper representation on the New SRO Board. The FSI also believed that the New SRO's governance structure is designed to insure that neither the largest nor the smallest broker-dealer firms can dominate the New SRO Board. 91 Another commenter, which identified itself as a small broker-dealer, supported the proposal and argued that small members would have increased representation on the New SRO Board as a result of the increase in their representation to three seats from the current one seat. 92 90 *See* Castiglioni Letter, FSI Letter, and Bakerink Letter. 91 *See* FSI Letter. 92 *See* Moloney Letter. 2. Appointed Governors Commenters were concerned that the majority of the Governors serving on the New SRO Board would be appointed by the New SRO Board itself and would not be elected by member firms. 93 Similarly, some commenters objected to members no longer having the right to vote for all Governors. 94 In addition, one commenter argued that the New SRO Board structure could create a “self-perpetuating” club in which the New SRO Board's Governors would not be held accountable to serve the members' needs. 95 93 *See* Lek Letter, RKeenan Letters I & II, Hebert Letter, Mayfield Letter, Blumenschein Letter, Eitel Letter II, de Leeuw Letter, Elish Letter, Patterson Letter, Schriner Letter, Roberts Letter, and Biddick Letter. 94 *See* Kramer Letter and Hebert Letter. 95 *See* Wachtel Letter. Some of these commenters maintained that the appointment of Governors is contrary to good corporate governance and questioned the independence and accountability of the appointed Governors. 96 Another commenter was concerned that the Public Governors would be appointed by the securities industry representatives on the Board. 97 This commenter believed that Public Governors should be chosen by the investing public or their representatives which would ensure that the views of investors would be heard and that their interests would be protected. 98 96 *See* Mayfield Letter, Isolano Letter, Hebert Letter, Wachtel Letter, and Lek Letter. 97 *See* Massachusetts Letter. 98 *Id* . 3. Industry Representation A number of commenters objected to the proposed composition of the New SRO Board for failing to include more industry representatives to serve as Governors. 99 These commenters stated that the ten Governor positions allocated to industry representatives are insufficient. These commenters also opined that the lack of industry representatives on the Board would defeat the purpose of self-regulation. 99 *See,* *e.g.* , Roberts Letter, Busacca Letter, Blumenschein Letter, and Miller Letters. In contrast, one commenter stated that the New SRO Board structure would have too many industry representatives and not enough Public Governors. 100 This commenter noted that, because the New SRO Board would include ten Industry Governors as well as representatives of the NASD and NYSE Group on an *ex officio* basis, Governors who are from the securities industry would outnumber the Public Governors on the New SRO Board. Another commenter added that, because the current NASD definition of Public Governors would be amended, any ex-industry official or ex-industry regulator would be eligible to be a Public Governor, thereby biasing the New SRO Board toward industry interests. 101 100 *See* Massachusetts Letter. 101 *See* Blumenschein Letter. Several commenters supported the regulatory consolidation, noting that the proposed amendments are intended to maintain adequate representation on the New SRO Board for industry members. 102 Two commenters noted that the proposed composition of the industry members on the New SRO Board and in New SRO Board committees appears to promote diversity among industry representation on the Board. 103 Another commenter indicated that balanced representation of industry and non-industry members, as well as large and small firms, would reflect a broad spectrum of industry experience and would preserve the constructive feedback of non-industry participants. 104 102 *See* NAIBD Letter, Vanguard Letter, Moloney Letter, and FSI Letter. 103 *See* NAIBD Letter and FSI Letter. 104 *See* Vanguard Letter. One commenter noted confusion about the proposed rule change regarding the eligibility for the “Independent Dealer/Insurance Affiliate Governor” and “Investment Company Affiliate Governor” positions. 105 105 *See* Judith Schapiro Letter. B. State Law and Proxy 1. Timing Several commenters claimed that the proxy process was rushed, which forced members to make quick and uninformed decisions. 106 Other commenters stated that the proxy process was deceptive because it was held over the holiday season and involved alleged procedural omissions and coercive tactics by the NASD, including the threat of Commission action if the By-Law revisions were not approved. 107 Another commenter did not dispute the results of the vote but expressed concerns about the lack of discussion of alternative ways to structure the New SRO Board. 108 106 *See* Mortarotti Letter, Jordan Letter, Busacca Letter, Schunk Letter, and Cray Letter. 107 *See* Benchmark Letter, Benchmark/Standard Letter I (adding Standard to the Benchmark Letter to be an additional objector), Daily Letter, Cray Letter, Eitel Letter I, Miller Letters, and John Q Letter. 108 *See* IASBDA Letter. In addition, a few commenters claimed that the NASD did not present the New SRO By-Laws to the NASD membership for a vote quickly enough, thereby violating current NASD By-Laws that require a membership vote within 30 days of the submission of the proposal to the membership. 109 109 *See* Jester Letter I, Miller Letters, and Blumenschein Letter. In response to the NASD Response Letter, Jester submitted a supplemental comment letter, asserting that the NASD was still required to comply with Article XVI of the NASD By-Laws which requires that By-Law amendments must be approved within 30 days of the submission of the proposal to the membership, even if the By-Law amendments are approved at a special meeting. *See* Jester Letter II. 2. Disclosure Several commenters questioned the adequacy of the proxy statement. 110 These commenters indicated that oral statements made by NASD staff were not contained in the proxy statement, such as representations that the Commission would force consolidation in the event the members did not support the proposal 111 and that the NYSE required the New SRO By-Law provisions. 112 Two other commenters stated that the proxy statement failed to explain why the merger is connected to the governance changes, specifically the one firm, one vote policy. 113 These commenters also believed that the transaction is unfair to the NASD members who are not also NYSE members. 114 Another commenter objected to the proposed payments to the NYSE and believed that proposed consolidation needed more study by the current NASD members. 115 110 *See* Darcy Letter, Roberts Letter, Busacca Letter, Benchmark Letter, Benchmark/Standard Letter I (adding Standard to the Benchmark Letter to be an additional objector), Benchmark/Standard Letter II, Cray Letter, Spindel Letter, and Schriner Letter. 111 *See* Roberts Letter, Blumenschein Letter, Eitel Letter II, de Leeuw Letter, Elish Letter, Patterson Letter, Biddick Letter, Wachtel Letter, Isolano Letter, and Miller Letters. 112 *See* Wachtel Letter. 113 *See* Benchmark Letter and Benchmark/Standard Letter I (adding Standard to the Benchmark Letter to be an additional objector). Some commenters also noted that they were unable to get answers to their questions about the consolidation from the NASD. *See* , *e.g.* , Miller Letters. 114 *Id.* 115 *See* Kramer Letter. 3. Payment of $35,000 Several commenters questioned the calculation and origin of the $35,000 one-time payment to the NASD members. 116 Two commenters specifically posited whether the representation by the NASD that the payment came from reduced costs is misleading. 117 Other commenters expressed concern that the $35,000 amount appears arbitrary and may have been calculated based on financial information the NASD knows about its member firms. 118 One commenter believed that the $35,000 is a fraction of the value of the NASD, 119 while other commenters wanted an explanation as to why a larger payment to members is not possible. 120 One of these commenters submitted a supplemental comment letter in response to the discussion of the proposed $35,000 payment to NASD members in the NASD Response Letter. 121 This commenter stated that, from the perspective of an NASD member, the focus of the proxy statement was “the fundamental change in members' voting rights and the $35,000 that each member is to receive in exchange for ‘surrendering' members’ equity valued at as much as $300,000, or more, per NASD member.” 122 The commenter believed that the discussion of the $35,000 in the proposed rule change was inadequate, and stated that the Commission “should disapprove the rule change, re-notice the issue properly or limit its findings to the issues it noticed.” 123 116 *See* Kosinsky Letter, Busacca Letter, Benchmark Letter, Benchmark/Standard Letter I (adding Standard to the Benchmark Letter to be an additional objector), Benchmark/Standard Letter II, Daily Letter, Miller Letters, Wachtel Letter, John Q Letter, and Schriner Letter. 117 *See* Busacca Letter and Schriner Letter. 118 *See* Isolano Letter, Blumenschein Letter, Eitel Letter II, de Leeuw Letter, Elish Letter, Patterson Letter, and Biddick Letter. 119 *See* Lundgren Letter I. 120 *See* Benchmark Letter, Benchmark/Standard Letter I (adding Standard to the Benchmark Letter to be an additional objector), and Benchmark/Standard Letter II. 121 *See* Benchmark/Standard Letter II. 122 *Id.* (also noting that at least 22 comments mentioned or raised issues relating to the $35,000 payment, which, according to the commenter, “clearly demonstrate the materiality of the representations about the $35,000 payment”). 123 *Id.* Some commenters questioned whether the payment was an improper inducement to members in order to obtain their vote. 124 One commenter expressed its concern that NASD member firms would receive funds for voting in favor of the consolidation, while public investors would not receive any financial benefit from the anticipated cost savings. 125 Commenters also inquired whether a fairness opinion was done in connection with the consolidation or the $35,000 payment 126 and whether the Internal Revenue Service gave a legal opinion on this payment. 127 124 *See* Eitel Letter II, Blumenschein Letter, Busacca Letter, Isolano Letter, Spindel Letter, Elish Letter, de Leeuw Letter, Patterson Letter, and Biddick Letter. 125 *See* Caruso Letter. 126 *See* Cohen Letter, Lundgren Letter I, and Miller Letters. 127 *See* Daily Letter. Two commenters believed that the monetary aspect of the proposed consolidation is simply a return of monies to the members for increased efficiency. 128 One of these commenters, which identified itself as a small NASD member firm, believed that the $35,000 payment would benefit many of the small firms financially. 129 This commenter did not believe that members' votes were bought or that members had given up voting rights because members retain a vote on any future By-Law changes. 130 128 *See* Moloney Letter and FSI Letter. 129 *See* Moloney Letter. 130 *Id.* 4. Delaware Law One commenter argued that the proposal violates Delaware law because the omission in the proxy materials of the merger contract between NYSE and NASD makes the transaction illegal. 131 This commenter further believed that the proposed merger may have violated Delaware law by providing a proxy statement that allegedly had conclusory, one-sided statements. 132 131 *See* Cray Letter. 132 *Id.* Another commenter argued that NASD violated Delaware law because it has not held an annual meeting in 13 months, which, according to the commenter, is required under Delaware law. 133 Another commenter stated that the proposed combination, “by combining under current unknown By-Laws,” violates the NASD's charter as stated on August 7, 1936. 134 133 *See* John Q Letter. 134 *See* Blumenschein Letter. 5. Antitrust Laws Some commenters posited that the proposal violates antitrust laws. 135 135 *See* Blumenschein Letter, Eitel Letter II, de Leeuw Letter, Elish Letter, Patterson Letter, and Biddick Letter. C. Efficiency and Investor Protection 1. Efficiency Some commenters explicitly questioned the benefits of the proposed consolidation. 136 Three commenters argued that the consolidation would benefit mainly the larger firms; 137 two commenters noted specifically that firms should not have to incur costs to make changes in advertising, letterhead, and signage because the proposal mainly would benefit the larger firms. 138 Several commenters argued that the proposal would benefit the larger firms, while being disruptive to small broker-dealers. 139 136 *See* RKeenan Letter I, Mayfield Letter, and Schooler Letter. 137 *See* Vande Weerd Letter, Isolano Letter, and Eitel Letter II. 138 *See* Flater Letter (also noting that the $35,000 payment does not cover the cost of these changes) and Vande Weerd Letter. 139 *See* Schooler Letter, Biddick Letter, de Leeuw Letter, Eitel Letter II, Elish Letter, Blumenschein Letter, Isolano Letter, and Patterson Letter. One commenter did not believe that the merger would be effective in reducing duplicative regulation because there are only about 170 firms subject to both NASD and NYSE rules. 140 The commenter believed that it would be easier for those 170 firms to be regulated by NYSE than to effect the consolidation solely for the benefit of those 170 firms. 141 One commenter argued that the merger is unnecessary because most firms already belong to the NASD. 142 140 *See* Spindel Letter. 141 *Id.* 142 *See* Hebert Letter. Commenters who supported the proposal believed that the proposed consolidation would benefit investors by streamlining regulation and simplifying compliance with a uniform set of regulations 143 or by increasing efficiency. 144 In this regard, some of these commenters believed that the use of two distinct rulebooks has caused unnecessary redundancy, complication, and conflict, which in their view undermines basic SRO objectives of effectively and efficiently protecting the capital markets and investors. 145 In addition, two commenters believed that combining the conflicting rules of the two SROs into one set of rules and eliminating inconsistent interpretations would be benefit both large and small firms. 146 143 *See* Vanguard Letter, SIFMA Letter, Stringer Letter, Bakerink Letter, NSCP Letter, and FSI Letter. In addition, six commenters stated their agreement with SIFMA's Letter. *See* Casady Letter, Alsover Letter, Johnstone Letter, Robertson Letter, Mungenast Letter, and Pictor Letter. 144 *See* Moloney Letter, Kirk Letter, Castiglioni Letter, and NAIBD Letter. 145 *See* Vanguard Letter, SIFMA Letter, and NSCP Letter. In addition, seven commenters stated their agreement with SIFMA's Letter. *See* Casady Letter, Alsover Letter, Johnstone Letter, Robertson Letter, Mungenast Letter, Stringer Letter, and Pictor Letter. 146 *See* Bakerink Letter and Vanguard Letter. 2. Investor Protection Some commenters noted that having one less regulator overseeing the securities firms that deal with the public would harm investors. 147 One commenter likened the regulatory consolidation to reducing the number of “police departments” that oversee the markets. 148 Another commenter stated that the proposal would remove any competitiveness between the two SROs and any choice that firms would have. 149 Yet another commenter added that having two independent regulatory entities would create advantages from a regulatory point of view. 150 This commenter noted that the NASD and NYSE are able to bring distinct perspectives to regulating their member firms and that such independence is vital to preventing SROs and other regulators from becoming myopic about certain regulatory issues. On the other hand, one commenter believed that the proposed structure would offer the best opportunity for balanced and effective regulation in furtherance of customer protection. 151 147 *See* King Letter, Eitel Letter II, de Leeuw Letter, Elish Letter, Patterson Letter, Biddick Letter, and Massachusetts Letter. 148 *See* King Letter. 149 *See* Schooler Letter. 150 *See* Massachusetts Letter. 151 *See* FSI Letter. Other commenters believed that the proposal overlooked investor interests because of the failure to include investors in the merger talks, 152 the lack of accountability and control over NASD/NYSE management by owners, 153 and the conflict of interest on the part of the NASD management because of benefits they may receive in connection with the merger. 154 Other commenters questioned the effectiveness of the regulatory oversight of a board whose members are directly funded by the persons they are regulating. 155 152 *See* King Letter. One commenter who supported the consolidation urged that compliance professionals be included in the consolidation process. *See* NSCP Letter. 153 *See* Lundgren Letter I. 154 *See* Lundgren Letter II, Eitel Letter II, de Leeuw Letter, Biddick Letter, Elish Letter, Isolano, and Patterson Letter. Several commenters also questioned the compensation packages of the NASD management. *See* , *e.g.* , Isolano Letter, Mayfield Letter, and Daily Letter. 155 *See* Biddick Letter, de Leeuw Letter, Eitel Letter II, Elish Letter, Isolano Letter, and Patterson Letter. D. Arbitration Five commenters focused on the effects the merger may have on the arbitration of customers' disputes with their brokers. 156 One commenter urged the Commission to disapprove the merger, stating that it would reduce investor rights “by cutting the number of major available arbitration venues in half.” 157 Another recommended that the Commission consider holding public hearings to discuss anticipated benefits and detriments of consolidating the NASD and NYSE dispute resolution forums before approving the merger. 158 156 *See* Caruso Letter, Greenberg Letters I & II, Lundgren Letter, Massachusetts Letter, and Public Members of SICA Letter. 157 *See* Lundgren Letter. 158 *See* Caruso Letter. One commenter expressed the view that a single SRO arbitration forum will heighten public investors' suspicion that SRO arbitration is “less than independent and hence less than fair.” 159 This commenter suggested either creating an “independent securities arbitration forum, with SEC oversight and public investor and securities industry participation” or providing that public investors may choose between resolving their disputes in court or in arbitration. In addition, this commenter stated that the role of the Securities Industry Conference on Arbitration (“SICA”) should be strengthened and that public members should compose at least one half of the voting members of SICA. 159 *See* Public Members of SICA Letter. Another commenter cited those views with approval, stating that combining the NASD and NYSE arbitration forum is “not desirable” and called for changes in the arbitration system “to make it fairer to investors” including the elimination of “industry” arbitrators. 160 This commenter also expressed concern about the use of dispositive motions in SRO arbitration and stated that the New SRO should incorporate the relevant NYSE rule rather than the NASD rule in its arbitration code. 160 *See* Massachusetts Letter. One commenter noted that the NASD and NYSE forums have different rules, procedures, and administrative practices, and stated this “can often have a significant procedural impact on an arbitration proceeding.” 161 Expressing skepticism that a single forum will provide “any recognizable benefits” for public customers, this commenter stated that a “notable portion of the anticipated cost savings” from the regulatory consolidation should be allocated toward the reduction of public investors' filing, administrative and forum fees. 161 *See* Caruso Letter. As discussed more fully below, NASD responded to comments, in part, by citing studies and reports analyzing its arbitration forum, and noting that it is subject to SEC oversight, including through inspections and the rule approval process. 162 One commenter questioned the methodology and impartiality of the studies and reports, as well as the efficacy of SEC oversight. 163 This commenter also noted that he had filed a petition for rulemaking with the Commission calling for a number of changes in arbitration rules and stated that these changes would “correct many aspects of the arbitration process, which make the process unfair to the investing public.” 164 162 *See* NASD Dispute Resolution Letter, *supra* note 5. 163 *See* Greenberg Letters I & II. 164 *Id. See also* Request for rulemaking under the Securities Exchange Act of 1934 concerning arbitration sponsored by NASD Dispute Resolution, Submitted by Les Greenberg, Esq., File No. 4-502 (May 13, 2005). E. Other Matters 1. Request for Delay Several commenters argued that the proposal should be put on hold for one year, 165 while two other commenters 166 suggested tabling the proposal until after the resolution of the Standard Lawsuit. 167 Another commenter suggested that the Commission could approve the consolidation but require another vote in three years on the composition of the New SRO Board, after the firms and the public have had a chance to evaluate the effects of the merger. 168 This commenter did not express concern about the voting results but about the lack of any discussion of other alternatives to the New SRO Board's composition. 169 165 *See* Busacca Letter. Three commenters argued that the proposal should be put on hold and membership should be consulted and given the opportunity for input. *See also* Miller Letters, Kramer Letter, and Hebert Letter. 166 *See* Benchmark Letter and Benchmark/Standard Letter I (adding Standard to the Benchmark Letter to be an additional objector). 167 The Court recently granted the Defendants' motion to dismiss, finding that Standard had failed to exhaust its administrative remedies. *See Standard Investment Chartered, Inc.* v. *National Association of Securities Dealers, Inc.* , No. 07-CV-2014 (S.D.N.Y.), 2007 WL 1296712 (May 2, 2007). According to the Benchmark/Standard Letter II, the Plaintiffs filed a motion for reconsideration on May 17, 2007. *See supra* note 81. On July 13, 2007, the Court denied Standard's motion for reconsideration. *See Standard Investment Chartered, Inc.* v. *National Association of Securities Dealers, Inc.* , No. 07-CV-2014 (S.D.N.Y.) (July 13, 2007) (denying Plaintiff's Motion for Reconsideration of the Court's May 2, 2007 Opinion and Order). 168 *See* IASBDA Letter. This commenter argued that a reassessment in three years might “possibly calm the concerns of a large number of small firms. . .which feel disenfranchised by a process that shows no discussion of alternatives.” 169 *Id.* A commenter suggested that, in lieu of this proposed rule change, it would be “easier for those firms that are currently regulated by NYSE to simply not be regulated by NASD at all and to instead be regulated by NYSE staff using current SEC and NYSE rules which could be supplemented by NYSE adopting many of the current NASD rules to which the large New York Stock Exchange member organizations must currently comply, since they are also NASD members.” *See* Spindel Letter. Other commenters believed that the proposed regulatory consolidation should occur as soon as practicable or in the timeframe announced by the NASD and NYSE Group. 170 One of these commenters believed that the regulatory consolidation should proceed because a majority of the members already have given their approval to the proposed regulatory consolidation. 171 170 *See* Johnstone Letter, Casady Letter, SIFMA Letter, Moloney Letter, Stringer Letter, Alsover Letter, Robertson Letter, and Pictor Letter. 171 *See* Moloney Letter. 2. Public Hearing Two commenters urged the Commission to consider the proposal at a public hearing. 172 As noted above, one of these commenters recommended that the Commission consider holding public hearings to discuss anticipated benefits and detriments of consolidating the NASD and NYSE dispute resolution forums before approving the consolidation. 173 Another commenter stated that the Commission and government oversight committees should be part of the discussion of the consolidation. 174 172 *See* Harriman-Thiessen Letter and Caruso Letter. 173 *See* Caruso Letter. 174 *See* Darcy Letter. IV. NASD Response to the Comment Letters NASD submitted two letters to respond to issues raised by the commenters, including the proposed governance structure, the proxy statement, the approval process for the By-Law amendments, and the $35,000 payment. 175 NASD also submitted two letters providing opinions of counsel with respect to the approval process of the By-Law amendments and the $35,000 payment. 176 In two separate letters, NASD Dispute Resolution responded to comments regarding the effects of the consolidation on arbitration of customers' disputes with member firms. 175 *See* NASD Response Letter and NASD Supplemental Response Letter, *supra* note 5. 176 *See* RLF Letter and DPW Letter, *supra* note 5. A. Fair Representation NASD stated that the proposed rule change was designed to provide a “carefully balanced and calibrated governance structure that was approved by a majority of the membership,” rather than the existing NASD governance structure preferred by a number of commenters. 177 NASD stated that the proposed By-Law changes satisfy the statutory requirement for “fair representation” pursuant to Section 15A(b)(4) of the Exchange Act. 178 177 NASD Response Letter, *supra* note 5, at 4. 178 *Id.* at 4-5. 1. Industry Representation and Classification of Governors In response to commenters who contended that the New SRO Board would have insufficient industry representation, NASD stated that the proposal “ensures substantial industry representation, while still maintaining the overall independence of the New SRO Board and the numerical dominance of Public Governors” and “comfortably fits within the parameters the Commission has previously articulated to comply with the fair representation requirement.” 179 Specifically, NASD noted that 40% of the New SRO Board would be composed of industry representatives. 180 NASD also noted that the member representation on the New SRO Board would exceed the member representation of The NASDAQ Stock Market LLC (“Nasdaq”) (whose Board is composed of 20% member representatives), NYSE LLC (whose Board is wholly independent), NYSE Regulation (whose Board is wholly independent 181 ), and would be comparable to member representation of the Chicago Stock Exchange (“CHX”) (twelve directors, of which five are “participants”) and the International Securities Exchange LLC (“ISE”) (14 directors, of which six are market participants allocated by business types). 182 179 *Id.* at 5. 180 *Id.* 181 The Commission notes that all of the directors on the Board of NYSE Regulation, with the exception of the Chief Executive Officer, must qualify as independent under the independence policy of the board of directors of NYSE Euronext. *See* Second Amended and Restated By-Laws of NYSE Regulation, Inc., Article III, Section 1. 182 NASD Response Letter, *supra* note 5, at 5-7. In addition to the 14 directors cited in the NASD Response Letter, the Commission notes that the President and CEO of ISE also serves on the ISE Board of Directors for a total of 15 directors. *See* ISE Constitution, Article III, Section 3.2. In response to commenters who stated that the proposed rule change would abolish the current “one-member-one-vote” governance structure and the existing right to elect all of the NASD Board seats (with the exception of the Chair of the National Adjudicatory Council and the NASD CEO, who hold seats based on position), NASD stated that the proposed governance structure ensures diversity of member representation on the New SRO Board by guaranteeing certain seats for different size firms and those with particular business models. 183 In this regard, NASD noted that small firm representation would increase from one to three guaranteed seats. 184 NASD also noted that the “proposed composition of and selection process for the Small Firm Governors and Large Firm Governors are identical, ensuring fairness and balance between those firms that make up the largest percentage of membership and those firms that employ the largest percentage of the registered representative population.” 185 183 NASD Response Letter, *supra* note 5, at 5. 184 *Id.* 185 *Id.* NASD noted that the “New SRO intends to maintain additional member involvement in the administration of the New SRO's affairs through representation on District Committees, Standing Committees, the Advisory Council (consisting of the Chairs of the District Committees and the Market Regulation Committee), the Small Firm Advisory Board, disciplinary panels and the National Adjudicatory Council.” 186 NASD also noted that the amended By-Law changes would maintain a one-member-one-vote-system for all future By-Law changes. 187 186 *Id.* at 6. 187 *Id.* at 5. Finally, NASD noted its belief that the presence of no fewer than eleven Public Governors, none of which may have a material relationship with a broker or dealer or registered SRO, satisfies the requirement to have at least one director representative of issuers and investors. 188 188 *Id.* 2. Appointed Governors In response to commenters who objected to the number of Governors who would be appointed rather than elected, NASD believed that these commenters failed to appreciate that the proposed governance structure “strikes a balance between the necessity of overall independence and the desire for substantial, meaningful and diverse industry representation.” 189 NASD noted that the proposal provides for the “Small Firm, Mid-Size Firm, and Large Firm Governors to be elected by firms of corresponding size, each with an equal vote.” NASD also noted that the proposal exceeds the representation and participation requirements of other SROs whose governance rules have previously been approved by the Commission. Specifically, NASD noted that the business combination between New York Stock Exchange, Inc. (“NYSE Inc.”) and Archipelago Holdings, Inc. satisfied a parallel fair representation standard pursuant to Section 6(b)(3) of the Exchange Act with the requirement that members could elect 20% of the boards of New York Stock Exchange LLC and NYSE Regulation and a provision allowing members to nominate directly candidates for those seats through a petition process. 190 NASD stated that the New SRO By-Laws would allow members to elect at least 28% of the total number of directors on the Board. 191 NASD noted that members may petition to place alternative candidates on the ballot for their respective member-elected seats. 189 *Id.* at 6. 190 *Id.* at 5. 191 *Id.* NASD noted that the proposed rule change provides for three additional industry seats, namely, the Investment Company Affiliate Governor, Independent Dealer/Insurance Affiliate Governor, and Floor Member Governor. 192 Moreover, NASD has committed that the Charter of the New SRO's Nominating Committee provides that at least 20% of the Committee will be composed of Industry Governors that are associated with New SRO members. 193 According to NASD, as a trade-off to substantial industry participation on the Board and to maintain its overall independence, “it is reasonable and sensible to ensure that public members are selected by a nominating committee and that the Board is not dominated by the industry.” 194 NASD noted that the three appointed Industry Governors represent seats with distinct business models and that are important in informing the Board's deliberations. 195 192 *Id.* at 7. 193 NASD Supplemental Response Letter, *supra* note 5, at 4. NASD also noted that the proposal establishes a Nominating Committee that would nominate candidates for each seat other than that of the CEO. The Nominating Committee would be a subset of the Board determined in number and composition by the Board from time to time, provided that the number of Public Governors on the committee must always exceed the number of Industry Governors on it. NASD Response Letter, *supra* note 5, at 6. 194 NASD Response Letter, *supra* note 5, at 7. 195 Id. B. State Law and Proxy In response to some commenters who contended that NASD failed to follow its existing procedures for adopting By-Law amendments, specifically obtaining approval within the 30-day timeframe as set forth in Article XVI of the NASD By-Laws, 196 NASD stated that it acted in a manner consistent with state law, which provides alternative means to propose and adopt certain corporate governance changes. NASD stated that Article XVI of the NASD By-Laws is not an exclusive means by which member approval of amendments to the By-Laws can be obtained. NASD noted that “[m]embers of a Delaware non-stock corporation, including NASD, may take action at an annual or special meeting held pursuant to 8 Del. C. § 211(a) or, unless otherwise restricted by such corporation's certificate of incorporation, by written consent pursuant to 8 Del. C. § 228.” NASD explained that, under this authority, it convened a special meeting of NASD members pursuant to Article XXI of the NASD By-Laws at which the New SRO By-Law amendments were approved. 197 In addition, to further support its position, NASD submitted an opinion of counsel that, under Delaware law, “it is within the authority of the Members to approve proposed amendments to the By-Laws * * * at a special meeting held more than thirty days after the proposed By-Laws had been submitted to the Members,” and that the vote of NASD members “was a valid exercise” of the members” franchise rights and authorized by Delaware law. 198 196 Article XVI of the NASD By-Laws provides that amendments to the NASD By-Laws could become effective as of a date prescribed by the NASD Board, if the amendment is approved by a majority of the members voting within 30 days after the date of submission to the membership, and is approved by the Commission. 197 *See* NASD Response Letter, *supra* note 5, at 7. 198 *See* RLF Letter, *supra* note 5. NASD took issue with the view of several commenters that the proxy was incomplete or that certain statements by NASD management regarding the potential consequences of failing to approve the proposed By-Law changes were misleading. 199 NASD noted that all the issues raised by the commenters were subject to lively debate in advance of the member vote. Specifically, members received communications from both the NASD and groups opposing the transaction over a five week period that included “28 town hall meetings, conference calls, mailings, emails, and telephone calls.” 200 NASD stated that it “provided access to its members contact list to groups opposing the transaction, and thereby afforded these groups the opportunity to raise all of the issues to the membership,” who approved the By-Law amendments after considering all of these arguments. 201 In addition, NASD noted that the “proxy statement contained an extensive discussion of the negotiations with NYSE Group, the rationale for the $35,000 payment, and how the By-Law changes would affect the voting rights of NASD members.” 202 NASD maintained that the statements made prior to the member vote were consistent with the proxy statement. 203 199 *See* NASD Response Letter, *supra* note 5, at 8-9. 200 *Id.* at 9. 201 *Id.* 202 *Id.* 203 *Id.* In response to commenters' concerns regarding the amount of the $35,000 payment to be made to members upon the Closing of the Transaction, NASD noted that the proxy statement disclosed that the $35,000 payment was based on the expected future incremental cash flows that would result from the regulatory consolidation and was consistent with public guidance from the Internal Revenue Service (“IRS”). 204 In the NASD Supplemental Response Letter, NASD stated that its Certificate of Incorporation prohibits NASD from paying dividends to its members, and that doing so would result in forfeiture of NASD's tax-exempt status under Section 501(c)(6) of the Internal Revenue Code. 205 NASD also explained that the proposed $35,000 member payments did not constitute a prohibited dividend or comparable distribution, because they “are based on (and limited by) expected future incremental cash flows that would result from the regulatory consolidation.” 206 Further, NASD stated that “any direct payment unrelated to those efficiencies would be inconsistent with NASD's tax-exempt status.” 207 NASD determined that “$35,000 was the maximum member payment that the IRS could be expected, with a sufficient degree of confidence, to approve within the timeframe contemplated for the transaction.” 208 NASD requested a private letter ruling from the IRS approving the proposed regulatory consolidation, including the $35,000 payment, and, according to NASD, “[i]t was on this basis that the IRS agreed to issue such a ruling.” 209 NASD explained that “the proxy materials accurately state that member payments in excess of $35,000 could not be possible because such a payment, without the IRS's approval, could ‘seriously jeopardize’ NASD's tax-exempt status.” 210 To further support its position, NASD submitted an opinion of its outside tax counsel that described generally the case law, statutory provisions, and guidance published by the IRS relevant to the disclosure in the NASD's proxy statement, and concluded that if NASD had increased the amount of the $35,000 payment, there would have been a “serious risk” that the IRS would not have issued the rulings and that NASD could be found to violate the prohibition against private inurement. 211 In addition, NASD's outside Delaware counsel stated that, because the NASD's Certificate of Incorporation contains a prohibition against inurement, any payment that violates the federal tax code prohibition against inurement would also be void under Delaware law. 212 204 *Id.* 205 *See* NASD Supplemental Response Letter, *supra* note 5, at 2 (citing 26 U.S.C. 501(c)(6) (requirement that “no part” of an exempt entity's net earnings inure to any private shareholder or individual); I.R.S. Gen. Couns. Mem. 39862 (November 22, 1991) (“There is no *de minimis* exception to the inurement prohibition.”); *see also Spokane Motorcycle Club* v. *United States* , 222 F. Supp. 15 1, 153-54 (E.D. Wash. 1963) (refreshments provided at no cost to club members invalidated tax exemption)). 206 *See* NASD Supplemental Response Letter, *supra* note 5, at 2. 207 *Id.* at 3. 208 *Id.* 209 *Id.* 210 *Id.* 211 *See* DPW Letter, *supra* note 5. 212 *See* RLF Letter, *supra* note 5, at 5. In response to a commenter's question about the eligibility for the positions of the Investment Company Affiliate Governor and the Independent Dealer/Insurance Affiliate Governor, respectively, NASD stated that the “proposed rule change is intended to continue the presence on the New SRO Board of representatives from the particular business models of independent dealers/insurance companies and investment companies and to provide the Nominating Committee the flexibility to fill those Board seats with the best available candidates affiliated with a firm from those industry segments.” 213 213 *See* NASD Response Letter, *supra* note 5, at 8. C. Efficiency and Investor Protection NASD stated that the commenters who stated that the consolidation would result in less investor protection by reducing the number and diversity of regulators overseeing the industry overstated the value of a second, duplicative regulator and understated the benefits of the regulatory consolidation. 214 NASD stated that the combination would achieve “greater efficiencies, clarity and cost savings in the regulation of the financial markets” and that the “investor ultimately would be better protected by a single, more efficient regulator administering a single streamlined set of rules with the combined resources” of the two organizations. 215 214 *Id.* 215 *Id.* D. Arbitration NASD separately addressed comments regarding the merger of the NASD and NYSE arbitration forums. 216 It highlighted the results of studies commissioned by NASD 217 and the Commission 218 during the past decade, which focused on forum users' perceptions of fairness, as well as two General Accounting Office reports. 219 In NASD's view, “it is the quality of the forum that dictates fairness rather than an investor's ability to select one dispute resolution forum over another.” 220 NASD also noted that it currently administers over 94% of investor disputes with broker-dealers and that over the past decade the Commission has approved consolidation of the arbitration programs of other SROs with NASD with no adverse effects. 221 216 *See* NASD Dispute Resolution Letters I & II, *supra* note 5. 217 NASD Dispute Resolution Letter I, *supra* note 5 (citing G. Tidwell, K. Foster and M. Hummell, *Party Evaluations of Arbitrators: An Analysis of Data Collected from NASD Regulation Arbitrations* (August 5, 1999) *http://www.nasd.com/web/groups/med_arb/documents/mediation_arbitration/nasdw_009528.pdf* ). 218 NASD Dispute Resolution Letter I, *supra* note 5 (citing M. Perino, *Report to the SEC Regarding Arbitrator Conflict Disclosure Requirements in NASD and NYSE Securities Arbitrations* (November 4, 2002) *http://www.sec.gov/pdf/arbconflict.pdf* ). 219 NASD Dispute Resolution Letter I, *supra* note 5 (citing *Actions Needed to Address Problem of Unpaid Awards,* GAO/GGD-00-115 (June 2000); *Securities Arbitration: How Investors Fare,* GAO/GGD-92-74 (May 11, 1992)). 220 *See* NASD Dispute Resolution Letter I, *supra* note 5. 221 *Id.* (citing Securities Exchange Act Release No. 53128 (January 13, 2006), 71 FR 3550 (January 23, 2006) (approving consolidation with Nasdaq); Securities Exchange Act Release No. 45094 (November 21, 2001), 66 FR 60230 (December 3, 2001) (International Securities Exchange); Securities Exchange Act Release No. 40622 (October 30, 1998), 63 FR 59819 (November 5, 1998) (American Stock Exchange); Securities Exchange Act Release No. 40517 (October 1, 1998), 63 FR 54177 (October 8, 1998) (Philadelphia Stock Exchange); Securities Exchange Act Release No. 39378 (December 1, 1997), 62 FR 64417 (December 5, 1997) (Municipal Securities Rulemaking Board)). With respect to the independence of its forum—and the suggestion for creating an “independent” forum—NASD stated that it “is an independent forum.” 222 NASD explained that the majority of its Dispute Resolution Board and its National Arbitration and Mediation Committee are public representatives. It also noted that it is a member of SICA. In addition, NASD stressed that it is financially self-sufficient in that it is funded by fees charged to users of the forum—broker-dealers, their associated persons, and investors. 223 In this regard, NASD also stated that although the consolidation should result in economies of scale and increased efficiencies in administering the New SRO arbitration forum, investors do not contribute toward administrative costs. 224 Rather, NASD stated that investors “pay only the marginal (that is, direct) costs attached to their particular claim.” 225 222 NASD Dispute Resolution Letter I, *supra* note 5. 223 *Id.* 224 NASD Dispute Resolution Letter II, *supra* note 5. 225 *Id.* Responding to the suggestion that NASD rules provide that public investors may choose between resolving their disputes in court or in arbitration, NASD cited *Shearson/American Express, Inc.* v. *McMahon* 226 and subsequent cases in which the Supreme Court upheld the use of pre-dispute arbitration agreements. In NASD's view, the commenter's proposal “seeks to overturn federal case law dating back 20 years.” 227 Moreover, NASD stated that “[w]hen investors (and other parties) were offered a choice of another arbitration forum under the 2000 SICA Pilot, there was little interest.” 228 226 482 U.S. 220 (1987). 227 NASD Dispute Resolution Letter I, *supra* note 5. 228 *Id.* In particular, NASD noted “[t]he SICA Twelfth Report sums up the pilot's results this way: ‘From its inception, few investors (or their attorneys) elected to proceed at a non-SRO forum.’ Based upon responses to a survey of investors, SICA reported that investors' main reasons for not using the alternative forums were the higher fees at non-SRO forums, and a general degree of comfort with existing and more familiar procedures.” NASD also noted that it “continues to make significant improvements to the dispute resolution forum to make the process more transparent, fair, and efficient for investors and others who use the forum.” 229 With respect to a comment on the composition of arbitration panels, NASD noted that current NASD and NYSE rules provide that customer arbitrations are resolved either by a single public arbitrator or by a panel of two public and one non-public arbitrator. 230 Moreover, NASD stated that it and NYSE are working to harmonize their definitions of “public” and “non-public” arbitrators, and any resulting proposed rule changes would be filed with the Commission and subject to public comment at that time. 231 With respect to the comments regarding the use of dispositive motions at NASD and NYSE, NASD stated that it understands that NYSE arbitrators determine whether such motions will be heard at a hearing as well as the timing of the hearing. In contrast, NASD proposed a specific rule regarding dispositive motions. 232 NASD indicated that it will consider the comments pertaining to dispositive motions in the context of that specific rule proposal “and may further amend the proposal.” 233 229 *Id.* 230 NASD Dispute Resolution Letter II, *supra* note 5. 231 *Id.* 232 *Id.* (citing Securities Exchange Act Release No. 54360 (August 24, 2006), 71 FR 51879 (August 31, 2006) (File No. SR-NASD-2006-088)). 233 NASD Dispute Resolution Letter II, *supra* note 5. V. Discussion After careful review, and consideration of commenters' views and the NASD's correspondence responding to comments, the Commission finds that the proposed rule change is consistent with the requirements of the Exchange Act and the rules and regulations thereunder applicable to a national securities association. 234 In particular, the Commission finds that the proposed rule change is consistent with Section 15A(b)(2) of the Exchange Act, 235 which requires a national securities association to be so organized and have the capacity to carry out the purposes of the Exchange Act and to enforce compliance by its members and persons associated with its members with the provisions of the Exchange Act. The Commission also finds that the proposed rule change is consistent with Section 15A(b)(4) of the Exchange Act, which requires that the rules of a national securities association assure the fair representation of its members in the selection of its directors and administration of its affairs, and provide that one or more directors shall be representative of issuers and investors and not be associated with a member of the exchange, broker, or dealer. 236 Further, the Commission finds that the proposed rule change is consistent with Section 15A(b)(6) of the Exchange Act, 237 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. 234 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). 235 15 U.S.C. 78o-3(b)(2). 236 15 U.S.C. 78o-3(b)(4). 237 15 U.S.C. 78o-3(b)(6). Self regulation is the cornerstone of the regulatory system governing the U.S. securities markets. Over the years, the self-regulatory system has functioned effectively and has served investors, the securities industry, and the government well. However, NASD and NYSE and many of their members believe that the current self-regulatory system as it applies to member regulation should be simplified and duplicative rules and conflicting interpretations of such rules should be eliminated. To that end, NASD and NYSE Group have agreed to consolidate their regulation of member firms. The proposal before the Commission, which would amend the NASD By-Laws to establish the By-Laws of the New SRO, is a key component in effectuating this regulatory consolidation. These amendments would establish the structure of the New SRO, which, among other things, would be responsible for reviewing and harmonizing the duplicative NASD and NYSE rules governing member firm regulation and conflicting interpretations of those rules. NASD stated that it expects the New SRO to submit to the Commission within one year of the date of the Closing proposed rule changes that would constitute a significant portion of a harmonized rulebook, with the remaining rules being submitted to the Commission within two years of the Closing. 238 The Commission has requested that the New SRO provide the Commission with quarterly progress reports on the harmonization project. In the Commission's view, the consolidation of NASD and NYSE member firm regulation should help reduce unnecessary regulatory costs while, at the same time, increase regulatory effectiveness and further investor protection. 238 *See* NASD Supplemental Response Letter, *supra* note 5. The Commission discusses below the significant aspects of the proposed amendments to the NASD By-Laws. A. Fair Representation of Members 1. Introduction Section 15A(b)(4) of the Exchange Act 239 requires that the rules of a national securities association assure the fair representation of its members in the selection of its directors and administration of its affairs. This requirement helps to assure that members have a stake in the governance of the national securities association, which is charged with self-regulatory responsibilities under the Exchange Act. Under the New SRO By-Laws, the New SRO Board initially would consist of eleven Public Governors and ten Industry Governors, including a Floor Member Governor, an Independent Dealer/Insurance Affiliate Governor, an Investment Company Affiliate Governor, three Small Firm Governors, one Mid-Size Firm Governor, and three Large Firm Governors. 240 The CEO of the New SRO and, during the Transitional Period, the CEO of NYSE Regulation, also would be Governors on the New SRO Board. 241 The three Small Firm Governors, the one Mid-Size Firm Governor, and the three Large Firm Governors (collectively, “Firm Governors”) would be elected by the members of the New SRO. 242 39 42 239 15 U.S.C. 78o-3(b)(4). 240 *See* New SRO By-Laws, Article VII, Section 4 and Article XXII, Section 2(a). 241 *See* New SRO By-Laws, Article VII, Section 4, and Article XXII, Section 2. 242 *See* New SRO By-Laws, Article I(z), Article I(dd), Article I(xx), and Article VII, Section 4(a). 2. Board Composition i. Classification of Member Governors A number of commenters, who are NASD members, argued that the New SRO should retain the NASD's current “one firm, one vote” election process. These commenters contended that they would be disenfranchised by the New SRO By-Laws because, instead of being allowed to elect all Governors, New SRO members would be allowed to elect only those Governors who are from member firms that are comparable in size to their own firm. 243 Other commenters believed that the New SRO By-Laws would provide for effective, diverse representation of all members of the securities industry on the New SRO Board. 244 In response, NASD stated that the proposed governance structure ensures a diversity of member representation on the New SRO Board by guaranteeing certain seats for different size firms and for those firms with particular business models. 245 NASD also noted that small firm representation on the Board would increase from one to three guaranteed seats. 246 The Commission finds that the structure of the New SRO Board—specifically the requirement that three Governors be elected by Small Firm members, one Governor be elected by Mid-Size Firm members, and three Governors be elected by Large Firm members 247 —is consistent with the fair representation requirement of the Exchange Act. In the Commission's view, this structure is a reasonable method to assure the fair representation of the New SRO's members on the New SRO's Board by affirmatively providing various New SRO constituencies with representation on the New SRO Board. 248 As a result, neither the largest nor the smallest firms would be able to dominate the New SRO Board. Moreover, issues or concerns of a particular New SRO constituency could be brought to the attention of, and considered by, the New SRO Board. 243 *See, e.g.* , Lek Letter, Kosinsky Letter, Roberts Letter, RKeenan Letter II, Miller Letters, Blumenschein Letter, Eitel Letter II, de Leeuw Letter, Elish Letter, Patterson Letter, Callaway Letter, Isolano Letter, Hebert Letter, Biddick Letter, John Q Letter, and Schriner Letter. 244 *See* Castiglioni Letter, FSI Letter, and Bakerink Letter. 245 *See* NASD Response Letter, *supra* note 5, at 5. 246 *Id.* 247 *See* New SRO By-Laws, Article I(z), Article I(dd), Article I(xx), and Article VII, Section 4(a). 248 NASD noted that the proposed composition of and selection process for the Small Firm Governors and Large Firm Governors are identical, ensuring, according to the NASD, fairness and balance between those firms that comprise the largest percentage of membership and those firms that employ the largest percentage of the registered representative population. *See* NASD Response Letter, *supra* note 5, at 5. The Commission notes that it has previously approved a governance structure in which members are entitled to elect only those directors that are from the same class as the member. 249 Specifically, Primary Market Makers, Competitive Market Makers, and Electronic Access Members on the ISE are entitled to elect two directors each to represent these categories of ISE's members on the ISE Board. 250 In approving the governance structure of the ISE, the Commission found that the composition of the ISE Board and the selection of directors of ISE satisfied the fair representation requirement of Section 6(b)(3) 251 of the Exchange Act. 252 The Commission believes that New SRO having Governor positions based on the size of a firm is not dissimilar to the governance structure of the ISE, which allocates rights to elect Board seats based on the nature of the member's business. 249 *See* Securities Exchange Act Release No. 53705 (April 21, 2006), 71 FR 25260 (April 28, 2006) (relating to the reorganization of the ISE into a holding company structure, whereby ISE Holdings, Inc. would be the publicly-traded holding company of ISE, the SRO) (“Release No. 53705”). 250 The holders of “PMM Rights,” which Primary Market Makers must hold to obtain trading rights on the ISE, are entitled to elect two directors. The holders of “CMM Rights,” which Competitive Market Makers must hold to obtain trading rights on the ISE, are entitled to elect two directors. The holders of “EAM Rights,” which Electronic Access Members must hold to obtain trading rights on the ISE, are entitled to elect two directors. *Id.* 251 15 U.S.C. 78f(b)(3). Section 6(b)(3) of the Exchange Act is identical to Section 15A(b)(4) of the Exchange Act, except that Section 6(b)(3) applies to national securities exchanges and Section 15A(b)(4) applies to national securities associations. 252 *See* Securities Exchange Act Release No. 53705 (April 21, 2006), 71 FR 25260 (April 28, 2006) (noting that the ISE's proposed governance structure was substantially the same as that of its predecessor entity). In approving the governance structure of the predecessor entity, the Commission found that the selection of six of the 15 directors on the predecessor entity's board, and the manner in which such directors are nominated and selected, satisfied the fair representation requirement of Section 6(b)(3) of the Exchange Act. *See* Securities Exchange Act Release No. 45803 (April 23, 2002), 67 FR 21306 (April 30, 2002) (approving the predecessor entity's governance structure). ii. Appointed Governors Several commenters expressed concern that, because some Governors would be appointed, member firms would not have the right to elect all New SRO Governors. 253 NASD, however, stated that these commenters “fail[ed] to appreciate that the proposed governance structure strikes a balance between the necessity of overall independence and the desires for substantial, meaningful and diverse industry representation.” 254 NASD noted that, under the proposed New SRO By-Laws, members not only would be entitled to elect at least 28% of the total number of Governors, but also would be represented through three additional Industry Governor positions and the potential for member-elected Governors to serve on the Nominating Committee. 255 NASD also noted that the Commission previously approved governance structures that provided for a lower threshold of member representation regarding the selection of an SRO's directors and administration of its affairs than in the proposed New SRO By-Laws. Specifically, NASD noted that the Commission found consistent with the fair representation requirement the governance structure of NYSE LLC, whereby members elect 20% of the wholly independent board of directors of NYSE LLC and have the right to nominate directly candidates through a petition process. 256 NASD also noted that the Commission found that the governance structure of the Nasdaq, whose Board of Directors also is composed of 20% member representatives, satisfies the fair representation standard of the Exchange Act, and that member representation on the proposed New SRO Board would exceed that of the Nasdaq's Board of Directors. 257 253 *See* Lek Letter, RKeenan Letter I & II, Hebert Letter, Mayfield Letter, Blumenschein Letter, Eitel Letter II, de Leeuw Letter, Elish Letter, Patterson Letter, Schriner Letter, Roberts Letter, and Biddick Letter. *See also* Johnny Q Member Letters I & II, Benchmark/Standard Letter I, and Benchmark Letter, which referred to the Standard Lawsuit, *supra* note 81. 254 *See* NASD Response Letter, *supra* note 5, at 6. 255 *Id.* at 7. 256 *Id.* at 5 (citing Securities Exchange Act Release No. 53382 (February 27, 2006), 71 FR 11251 (March 6, 2006) (relating to the NYSE's business combination with Archipelago Holdings, Inc.) (“Release No. 53382”)). 257 *Id.* at 6 (citing Securities Exchange Act Release No. 53128 (January 13, 2006), 71 FR 3550 (January 23, 2006)). NASD also stated that member representation on the New SRO Board is comparable to member representation on the Chicago Stock Exchange (twelve directors, of which five are members) and the International Securities Exchange (14 directors, of which six are members). *Id.* The Commission finds that the structure of the New SRO Board, in which specified Governors are appointed and Firm Governors are elected, is consistent with the Exchange Act. The Commission notes that New SRO members will have the right to elect a total of seven Firm Governors out of 23 Governors (22 after the Transitional Period), or approximately 30% of all Governors. The Commission previously approved structures in which members were not guaranteed the right to elect all directors. 258 For example, the Commission approved ISE governance documents that provide that the holding company for ISE, not ISE members, would elect eight non-industry directors. In addition, Nasdaq's governance documents provide that Nasdaq members would have the right to elect 20% of Nasdaq's directors, while the holding company for Nasdaq would have the right to elect the remaining directors. 259 The Commission does not believe that the statute's standard of fair representation requires that members have the opportunity to vote for all SRO directors. 258 *See, e.g.* , Release No. 53705, *supra* note 249 (approving the proposal to allow ISE Holdings, Inc. to elect eight non-industry directors of ISE, the holders of PMM Rights to elect two directors of ISE, the holders of CMM Rights to elect two directors of ISE, and the holders of EAM Rights to elect two directors of ISE). 259 *See* Limited Liability Company Agreement of The NASDAQ Stock Market LLC, Section 9. Similarly, the Board members of the Boston Options Exchange Regulation, LLC (“BOXR”) are not directly elected by options participants at the Boston Options Exchange, LLC (“BOX”). BOXR's by-laws provide that all of the BOXR board of director positions are appointed by the Boston Stock Exchange, Inc. (“BSE”) Board, subject to two of the positions on the BOXR board being nominated by BOX options participants. BOXR has regulatory oversight authority over BOX, which is the exchange facility for BSE for the trading of standardized equity options securities. BSE is the sole shareholder of BOXR. *See* Securities Exchange Release No. 49065 (January 13, 2004), 69 FR 2768 (January 20, 2004) (SR-BSE-2003-04) (approving the creation of BOXR). 3. Industry Representation Several commenters argued that the New SRO Board lacks sufficient industry representation. 260 In contrast, one commenter argued that the New SRO Board would have too many industry representatives, 261 and other commenters supported the proposed balance between Industry Governors and Public Governors. 262 In response, NASD noted that the proposed governance structure ensures that at least 40% of the New SRO Board would be composed of industry representatives, which, according to the NASD, “ensures substantial industry representation, while still maintaining the overall independence of the New SRO Board and the numerical dominance of Public Governors.” 263 260 *See, e.g.* , Roberts Letter, Busacca Letter, Blumenschein Letter, Eitel Letter II, and Miller Letters. 261 *See* Massachusetts Letter. 262 *See* NAIBD Letter; *see also* FSI Letter. 263 *See* NASD Response Letter, *supra* note 5, at 5. The Commission believes that the requirement that the number of Public Governors exceed the number of Industry Governors on the New SRO Board is consistent with the Exchange Act. 264 Specifically, the Commission believes that this requirement represents a reasonable method to permit the New SRO Board to consider the needs of the entire SRO community, including large and small investors, issuers, and securities firms, while at the same time broadly assuring the independence of the regulatory function. The Commission notes that under the by-laws of certain other SROs and the current NASD By-Laws, the number of non-industry Governors must equal or exceed the number of industry governors (excluding the CEO). 265 In fact, the Commission has previously stated its belief that the fair representation requirement would not prohibit exchanges and associations from having boards of directors composed solely of independent directors (other than the CEO), and that in such case, the candidate or candidates selected by members would have to be independent. 266 264 *See* New SRO By-Laws, Article VII, Section 4(a). 265 *See, e.g.* , Philadelphia Stock Exchange (“Phlx”) Certificate of Incorporation, Article FOURTH (b)(iii)(A) and Phlx By-Laws, Article I, Sections 1-1(o) and

(p)and Article IV, Section 4-1 (providing that Phlx board will have a total of 23 governors, including twelve independent governors); and ISE Constitution, Article III, Section 3.2 (providing that the ISE Board will consist of 15 directors, including eight non-industry directors, of which two must be public representatives). Article VII, Section 4(a) of the current NASD By-Laws also provides that, if the number of Industry and Non-Industry Governors is 13-15, the Board shall include at least four Public Governors. If the number of Industry and Non-Industry Governors is 16-17, the Board shall include at least five Public Governors. If the number of Industry and Non-Industry Governors is 18-23, the Board shall include at least six Public Governors. In the instant proposal, NASD proposes to eliminate the Non-Industry Governor category and, thus, the New SRO Board would be composed of only Industry Governors, Public Governors, the CEO of the New SRO, and, during the Transitional Period, the CEO of NYSE Regulation. 266 *See* Release No. 53382, *supra* note 256. The Commission previously approved NYSE Inc. governance changes that established a fully independent board (other than the CEO), finding that such a board was consistent with the Exchange Act. *See* Securities Exchange Act Release No. 48946 (December 17, 2003), 68 FR 74678 (December 24, 2003) (relating to the amendment and restatement of the NYSE Constitution to reform the governance and management architecture of the NYSE). 4. Nominating Committee The New SRO would have a Nominating Committee that, during the Transitional Period, would be responsible for nominating persons to fill vacancies in Governor positions for which the full New SRO Board has the authority to fill. 267 Following the Transitional Period, the Nominating Committee would be responsible for nominating persons for appointment or election to the New SRO Board, as well as nominating persons to fill vacancies in appointed or elected Governor positions. 268 267 *See* New SRO By-Laws, Article XXII, Section 3. During the Transitional Period, the full New SRO Board would have the authority to fill vacancies in the Investment Company Affiliate Governor position and in the Joint Public Governor position. 268 *See* New SRO By-Laws, Article VII, Section 9. During the Transitional Period, the Nominating Committee would not nominate candidates for the seven Firm Governor positions to be elected at the first annual meeting following the Closing. 269 Instead, the NASD Board as constituted prior to the Closing would make nominations for the Small Firm Governors, the NYSE Group Board as constituted prior to the Closing would make nominations for the Large Firm Governors, and the NASD Board and NYSE Group Board jointly would make the nominations for the Mid-Size Firm Governor. In addition, prior to the Closing, the NASD Board and the NYSE Group Board would identify and appoint the eleven Public Governors and the three remaining Industry Governors. The Commission believes that the process for nominating the Industry Governors to be elected by the New SRO members at the first annual meeting, to be held during the Transitional Period, is a reasonable transitional measure that combines the input of the NASD Board (which includes member representatives) and the NYSE Group Board. Accordingly, the Commission finds that this transitional nominating process is consistent with the fair representation requirements of the Exchange Act. 269 *See* New SRO By-Laws, Article XXII, Section 4. The Nominating Committee would be composed of a number of Governors that is a minority of the entire New SRO Board. 270 During the Transitional Period, members of the Nominating Committee would be appointed jointly by the New SRO CEO and the CEO of NYSE Regulation as of Closing (or his duly appointed or elected successor as Chair of the New SRO Board), subject to ratification by the New SRO Board. 271 Following the Transitional Period, the composition of the Nominating Committee would be determined by the New SRO Board. The number of Public Governors on the Nominating Committee must equal or exceed the number of Industry Governors on the Nominating Committee. 272 270 NASD represented that a minority of the entire New SRO Board means “at least one less than half of the New SRO Board.” *See* NASD Response Letter, *supra* note 5, at 6. In addition, the number of Public Governors on the Nominating Committee must equal or exceed the number of Industry Governors on the Nominating Committee, and the New SRO CEO may not be a member of the Nominating Committee. *See* New SRO By-Laws, Article VII, Section 9(b). 271 *See* New SRO By-Laws, Article XXII, Section 1. 272 *See* New SRO By-Laws, Article VII, Section 9. The Commission believes that, to satisfy the Exchange Act's fair representation requirement, the New SRO must assure that its members have a say in the nomination of Governors for the New SRO Board. Other SROs have satisfied this requirement by having at least 20% member representation on their nominating committees. 273 In this regard, NASD has committed that the Charter of the New SRO's Nominating Committee provides that at least 20% of the Committee will be composed of Industry Governors that are associated with New SRO members. 274 The inclusion on the Nominating Committee of Industry Governors who are New SRO members should help to ensure that the input of members will be considered by the Nominating Committee when selecting nominee(s). Accordingly, the Commission finds that the structure and composition of the Nominating Committee are consistent with the fair representation requirements in Section 15A(b)(4) of the Exchange Act. 273 *See, e.g.* , Securities Exchange Act Release No. 53734 (April 27, 2006), 71 FR 26589 (May 5, 2006) (SR-Phlx-2005-93); Phlx By-Laws Article X, Section 10-19(a). 274 *See* NASD Supplemental Response Letter, *supra* note 5, at 4. 5. Petition Process The New SRO By-Laws contain a petition process that would allow Small, Mid-Size, and Large Firms to nominate one or more candidates whose name(s) would be placed on the ballot in addition to the candidates selected by the Nominating Committee. 275 Specifically, a candidate could be included on the ballot if at least three percent of the members entitled to vote for such candidates' election (in other words, three percent of the members entitled to vote for the Small Firm Governor, Mid-Size Firm Governor, and Large Firm Governor, respectively) petitions for the inclusion of such candidate. 276 In the case of petitions in support of more than one candidate for a Governor position, petitions would be required to be submitted by at least ten percent of the members entitled to vote for such nominees' election. The New SRO By-Laws also provide that the New SRO would provide administrative support to the candidates in a contested election by sending up to two mailings of materials prepared by the candidates. 275 *See* New SRO By-Laws, Article VII, Section 10. 276 The Secretary of the New SRO also would be required to certify that:

(i)The petitions are duly executed by the Executive Representatives of the requisite number of members entitled to vote for such nominee's/nominees' election, and

(ii)the candidate(s) satisfies/satisfy the classification (Large Firm, Mid-Size Firm or Small Firm) of the position(s) to be filled, based on such information provided by the candidate(s) as is reasonably necessary to make the certification. *See* New SRO By-Laws, Article VII, Section 10. The Commission notes that other SROs also have comparable petition processes that allow their members to nominate opposing candidates. 277 The Commission finds that the proposed petition process, coupled with the New SRO By-Law provisions on Board and Nominating Committee composition, should help ensure that all New SRO members are assured fair representation in the selection of Governors of the New SRO Board and therefore is consistent with the Exchange Act. 277 *See, e.g.* , ISE Constitution, Article III, Section 3.10 (providing that persons entitled to elect an ISE director also would be able to nominate rival candidates) and Phlx By-Laws, Article III, Section 3.7 (providing that Phlx member organizations will be permitted to make independent nominations for designated Phlx governors, which consist of the two member governors, the two designated independent governors, and the one Philadelphia Board of Trade governor) 6. Future By-Law Amendments The New SRO By-Laws contain a provision that would give members a voice in proposing changes to the New SRO By-Laws. 278 Specifically, amendments to the New SRO By-Laws could be proposed by a Governor or a committee appointed by the New SRO Board or any 25 members of the New SRO by petition signed by such members. Any such proposed amendment would be required to be considered by the Board. The Board, upon adoption of any such amendment to the By-Laws (except as to spelling or numbering corrections or as otherwise provided in the By-Laws) by a majority vote of the Governors then in office, would be required to submit the proposed amendments to the New SRO's members for approval. If the amendment was approved by a majority of the members voting within 30 days after the date of submission to the membership, and were approved by the Commission as provided in the Exchange Act, it would then become effective as of a date prescribed by the Board. The Commission believes that the procedures governing amendments to the New SRO By-Laws should help ensure that all New SRO members are assured fair representation in the administration of the New SRO's affairs and therefore is consistent with the Exchange Act. 278 *See* New SRO By-Laws, Article XVI, Section 1. 7. Member Participation on Committees In addition, the Commission finds that New SRO members' participation on various committees further provides for the fair representation of members in the administration of the affairs of an SRO, particularly with respect to participation on committees relating to rulemaking and relating to the disciplinary process. 279 In this regard, NASD noted that New SRO will continue extensive member involvement in the administration of its affairs through representation on various subject matter committees, disciplinary hearing panels, and the National Adjudicatory Council. 280 Such member participation includes, depending on the particular Committee or group, having input on the New SRO's rulemaking process and involvement in the disciplinary process. 281 279 *See* Release No. 53382, *supra* note 256, at 11260 (stating that the Commission believes that members' participation on various committees, including the Market Performance Committee of the NYSE Market, and the Regulatory Advisory Committee and Committee for Review of NYSE Regulation, further provides for the fair representation of members in the administration of the affairs of the exchange, including rulemaking and the disciplinary process, consistent with Section 6(b)(3) of the Act). 280 *See* NASD Supplemental Response Letter, *supra* note 5, at 4. 281 *Id.* B. Representation of Issuers and Investors Section 15A(b)(4) of the Exchange Act 282 requires that the rules of an association provide that one or more directors be representative of issuers and investors and not be associated with a member of the association or with a broker or dealer. In the NASD Response Letter, NASD stated that it believes that the presence of no fewer than eleven Public Governors, none of which may have a material relationship with a broker or dealer or registered SRO, satisfies the requirement to have at least one director representative of issuers and investors. 283 The Commission believes that the inclusion of public, non-industry representatives on New SRO Board is critical to an SRO's ability to protect the public interest. 284 Further, public representatives help to ensure that no single group of market participants has the ability to systematically disadvantage other market participants through the SRO governance process. The Commission believes that the New SRO Board's Public Governors could provide unique, unbiased perspectives that could enhance the ability of the New SRO's Board to address issues in a non-discriminatory fashion. 282 15 U.S.C. 78o-3(b)(4). 283 *See* NASD Response Letter, *supra* note 5, at 5. 284 *See* Regulation of Exchanges and Alternative Trading Systems, Securities Exchange Act Release No. 40760 (December 8, 1998), 63 FR 70844 (December 22, 1998) (stating that “representation of the public on an oversight body that has substantive authority and decision making ability is critical to ensure that an exchange actively works to protect the public interest and that no single group of investors has the ability to systematically disadvantage other market participants through use of the exchange governance process”). The Commission finds that the composition of the New SRO Board is consistent with the issuer and investor representation requirement of Section 15A(b)(4) of the Exchange Act. 285 285 15 U.S.C. 78o-3(b)(4). C. State Law, Proxy, and Other Issues Raised by Commenters 286 286 Commenters also stated that the regulatory consolidation would violate the antitrust laws. *See supra* Section III.B.5. With respect to the alleged violation of the antitrust laws, the Commission notes that NASD and NYSE Group filed notification reports with the Department of Justice and the Federal Trade Commission under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, and the waiting period for such a filing expired on April 6, 2007. *See supra* note 7. NASD filed the proposed rule change on Form 19b-4, which provides, in Instruction E thereto, that “[t]he Commission will not approve a proposed rule change before the self-regulatory organization has completed all action required to be taken under its constitution, articles of incorporation, bylaws, rules, or instruments corresponding thereto* * * ” 287 In addition, Section 19(b)(2) of the Exchange Act 288 requires that the Commission approve an SRO's proposed rule change only if it finds that the proposal is consistent with the requirements of the Exchange Act, and the rules thereunder applicable to the SRO. Among other things, national securities associations are required under Section 15A(b)(2) of the Exchange Act 289 to comply with their own rules. Thus, if NASD has failed to complete all action required to be taken under, or to comply with, its own Certificate of Incorporation or By-Laws, which are rules of the association, the Commission could not approve the proposed rule change under Section 19 of the Exchange Act. 290 287 17 CFR 249.819. However, the SRO is not required to complete all actions specified in any such constitution, articles of incorporation, bylaws, rules, or instruments with respect to

(i)compliance with the procedures of the Exchange Act or

(ii)the formal filing of amendments pursuant to state law prior to Commission approval. *Id.* 288 15 U.S.C. 78s(b)(2). 289 15 U.S.C. 78o-3(b)(2). 290 15 U.S.C. 78s. A number of commenters expressed concern about the approval process for the proposed amendments to the NASD By-Laws. 291 Some of these commenters argued that NASD violated various aspects of Delaware law, particularly with respect to obtaining member approval within the 30-day timeframe as set forth in Article XVI of the NASD By-Laws. 292 Other commenters questioned the adequacy of the disclosures in the proxy statement, particularly with respect to the proposed $35,000 payment by NASD. 293 In addition, the plaintiff in the Standard Lawsuit, as well as another entity, Benchmark Financial Services, Inc., through their attorneys, submitted a comment letter contending that, from the perspective of an NASD member, the focus of the proxy statement was “the fundamental change in members’ voting rights and the $35,000 that each member is to receive in exchange for ‘surrendering' members' equity valued at as much as $300,000, or more, per NASD member.” 294 Specifically, the Benchmark/Standard Letter II alleged an inconsistency between the statements in the proxy statement and the statements in the NASD Response Letter regarding the $35,000 payment 295 and concluded that “[t]he SEC cannot approve the $35,000 payment without determining whether the statements with respect to the Proxy Statement were truthful and complete.” 296 The Benchmark/Standard Letter II also argued that the discussion of the $35,000 in the proposed rule change was inadequate because neither the proposed rule change nor the Notice “mentioned or invited comment from the public or NASD members about the $35,000 payment.” 297 Accordingly, the Benchmark/Standard Letter II argued that the Commission “should disapprove the rule change, re-notice the issue properly or limit its findings to the issues it noticed.” 298 The Benchmark/Standard Letter I also quoted a statement in the district court's opinion in the Standard Lawsuit in which the court responded to Standard's contention that its lawsuit should not be dismissed for failure to exhaust administrative remedies because the Commission is an unsuitable forum in which to challenge the truthfulness of the proxy statement. The letter quoted from the district court decision as follows: 291 *See supra* notes 106 through 134 and accompanying text. 292 *See supra* notes 131 through 134 and accompanying text. 293 *See,* *e.g.* , Johnny Q Member Letters I & II, Benchmark/Standard Letters I & II, and Benchmark Letter. 294 *See* Benchmark/Standard Letter II. 295 The Benchmark/Standard Letter II noted that the proxy statement “unequivocally states that a payment larger than $35,000 ‘is not possible;' that it will be ‘funded by—and therefore limited by—the expected value of the incremental cash flows that will be produced by the consolidation transaction' and that if the ‘payment was higher, it could seriously jeopardize NASD's status as a tax-exempt organization.” ’ The Benchmark/Standard Letter II then stated that the discussion of the $35,000 payment in the NASD Response Letter—specifically the NASD's statement that the $35,000 “payments would fall within public IRS guidance, and the proxy statement made clear that the payments would be made by NASD”—is inconsistent with the proxy statement . *See* Benchmark/Standard Letter II. 296 *See* Benchmark/Standard Letter II. 297 *Id.* 298 *Id.* The Court is incredulous that the SEC would endorse proposed SRO rule changes that [as alleged in the Amended Complaint] were approved by the membership pursuant to a “proxy statement that could not possibly pass [muster] under the nation's securities laws and the disclosure requirements of the SEC's own rules ( *see, e.g.* , § 14(a) of the Securities Exchange Act of 1934 and Rule 14a-9 promulgated thereunder by the SEC and applicable Supreme Court precedent).” (Am. Compl. ¶ [4]) 299 299 *See* Benchmark/Standard Letter I (quoting Standard Lawsuit, 2007 WL 1296712 at *8) (first alteration added in the Benchmark/Standard Letter I, second alteration in court decision, third alteration added here to correct the Benchmark/Standard Letter I's omission of paragraph number). To the extent the Benchmark/Standard Letters suggested that the proxy statement delivered by the NASD to its members was not in compliance with the federal securities laws, the Commission notes that Rule 14a-9 under the Exchange Act 300 applies only to the solicitation of proxies with respect to securities registered pursuant to Section 12 of the Exchange Act and that none of the membership interests in NASD are so registered. 301 300 *See* 17 CFR 240.14a-9. 301 *See also* Rule 14a-2 under the Exchange Act, 17 CFR 240.14a-2. Whether an SRO failed to complete all action required to be taken under its constitution, articles of incorporation, bylaws, rules, or similar instruments ordinarily is not an issue before the Commission at the time it considers whether to approve a proposed rule change. However, in instances where there is a dispute about whether the SRO has failed to complete all necessary action prior to Commission approval, or where there is an alleged defect in such action, the Commission generally requests the SRO to supplement the proposed rule change to address issues raised by commenters. Accordingly, the Commission requested that NASD provide additional information about the disclosures regarding the $35,000 payment noted in the proxy statement, as well as about the fact that the time period between the submission of the proxy statement to members and the vote by members exceeded 30 days. In response to the Commission's request, NASD submitted a supplemental response letter providing additional information about its disclosures in the proxy statement regarding the $35,000 payment and the propriety of its decision to call a special meeting of members to amend the NASD By-Laws. 302 Specifically, NASD stated that “the proxy materials accurately state that member payments in excess of $35,000 would not be possible because such a payment, without the IRS's approval, could ‘seriously jeopardize’ NASD's tax-exempt status.” 303 In support of its contention, NASD stated that Section 501(c)(6) of the Internal Revenue Code and its Certificate of Incorporation prohibit it from paying any dividends to its members. 304 NASD explained that any member payments in connection with the Transaction are “based on (and limited by) expected future incremental cash flows that would result from the regulatory consolidation.” 305 Therefore, based on “public IRS guidance, the terms of the initial agreement between NASD and NYSE Group, Inc., and the importance of preserving NASD's tax-exempt status, NASD concluded that $35,000 was the maximum member payment that the IRS could be expected, with a sufficient degree of confidence, to approve within the timeframe contemplated for the transaction.” 306 NASD stated that it reached this conclusion, and decided to request the IRS's approval of the regulatory consolidation with a $35,000 payment, “through the exercise of business judgment by its disinterested Board of Governors.” 307 According to NASD, NASD Board members “fully informed themselves concerning the economics of the transaction (in particular the projected cost savings), the practical need for IRS approval, and the likelihood of obtaining that approval before determining that $35,000 was the maximum sum for which NASD could seek and expect to obtain approval from the IRS” and that “the Board's decision was taken in good faith and in full compliance with the Board members' fiduciary duties, and the resulting business judgment is entitled to deference.” 308 NASD then noted that, pursuant to this business judgment, “NASD requested a private letter ruling from the IRS approving the proposed regulatory consolidation, including a one-time payment [of $35,000] * * * based on the expected future incremental cash flows, examined in conjunction with other costs attributable to the transaction (including future dues rebates to be considered annually by the NASD Board over the following five years).” 309 NASD further noted that “[i]t was on this basis that the IRS agreed to issue such a ruling.” 310 Thus, NASD believes that the proxy materials accurately stated that payments in excess of $35,000 per member would not be possible because any such payment, without IRS approval, could “seriously jeopardize” NASD's tax-exempt status. 311 302 *See* NASD Supplemental Response Letter, *supra* note 5. 303 *See* NASD Supplemental Response Letter, *supra* note 5, at 3. 304 *Id.* In response to the statement that NASD members would be “surrendering members' equity valued at as much as $300,000” in the Benchmark Standard Letter II, NASD stated that the “combined effect of the prohibition against inurement to members of a tax-exempt organization (as outlined in [DPW Letter, *supra* note 5]) and of the certificate provision [which states that ‘no part of its net revenues or earnings shall inure to the benefit of any individual, subscriber, contributor, or member’] (as described in [the RLF Letter, *supra* note 5]) makes such an ‘equity' distribution impermissible.” *See* NASD Supplemental Response Letter, *supra* note 5, at 2. 305 *See* NASD Supplemental Response Letter, *supra* note 5, at 2. 306 *Id.* at 3. 307 *Id.* at 3. NASD stated that

(a)a majority of the NASD Board is drawn from outside the securities industry,

(b)no NASD Board member had any material conflict in connection with the proposed regulatory consolidation; and

(c)no NASD Board member was dominated by anyone else with such a conflict. *Id.* 308 *Id.* 309 *Id.* 310 *Id.* 311 *Id.* In addition, NASD furnished two opinions of outside counsel, one from NASD's tax counsel 312 and one from NASD's Delaware counsel. 313 With respect to the $35,000 member payment and pertinent to the commenters' argument that NASD could pay members more than $35,000 based on “member's equity valued at as much as $300,000, or more, per NASD member,” 314 NASD's outside tax counsel described generally the case law, statutory provisions, and guidance published by the IRS relevant to the disclosure in the NASD's proxy statement. This letter concluded that if NASD had increased the amount of the proposed $35,000 payment, there would have been a serious risk that the IRS would not have issued the rulings to NASD and NASD Regulation, Inc. that the proposed Transaction, which includes the $35,000 payment, would not affect the tax-exempt status of NASD and NASD Regulation. This letter stated that NASD “could be found to violate the prohibition against private inurement if it went forward with the proposed [$35,000 payment] without the benefit of a ruling.” 315 Specifically, NASD's outside tax counsel noted that “tax law contains an absolute prohibition on a distribution of assets by tax exempt organizations, including the NASD, to their members” but that there are limited exceptions to that prohibition for rebates of dues or fees, 316 distributions upon liquidation, and reasonable and appropriate expenses. 317 NASD's outside tax counsel discussed each exception and concluded that “[n]one of these exceptions clearly authorizes the proposed [$35,000 payment]” and that “the only way that NASD could make the proposed [$35,000 payment] was by securing a private letter ruling from the IRS.” 318 With respect to the determination of the amount of the payment to members, NASD's outside tax counsel stated that the proposed payment “was supported economically by the present value of the expected incremental future cash flows attributable to the Proposed Transaction after taking into account transaction costs, including future rebates and other reductions in fees that were described in the Proxy Statement.” 319 Thus, according to NASD's outside tax counsel, the IRS approved the proposed Transaction, including the payment, “because of

(i)the importance of the payment to the Proposed Transaction as a whole;

(ii)the financial data presented by NASD explaining that the amount of the [$35,000 payment] is expected to be paid out of the value of expected incremental future cash flows, rather than the value of NASD's equity; and

(iii)the unique facts and circumstances of the Proposed Transaction, including the [$35,000 payment].” 320 312 *See* DPW Letter, *supra* note 5. 313 *See* RLF Letter, *supra* note 5. 314 *See supra* note 304. 315 *See* DPW Letter, *supra* note 5, at 4-5. 316 NASD's outside tax counsel noted that “[a]lthough the aggregate amount of the proposed Member Payments fits within the amount of allowable rebates, the rebate exception does not squarely apply here because a $35,000 payment would far exceed the $1,200 of current-year paid-in dues of those NASD members subject to the lowest annual payments” and “[u]nder the published rulings, a payment of $35,000 could not be made to those small members without risking the loss of NASD's tax exemption.” Thus, based on these published rulings, if NASD had utilized the rebate of dues and fees exception, small-firm members would receive a rebate in the range of $1,200, while large-firm members would receive a much larger rebate. *Id.* at 3. 317 *Id.* at 1-4. 318 *Id.* at 1-2. 319 *Id.* at 4. 320 *Id.* at 4-5. NASD's outside Delaware counsel addressed both the comment that a larger member payment could have been made based on “member's equity” and the comment that NASD should have obtained approval of the By-Law amendments within the 30-day timeframe as set forth in Article XVI of the NASD By-Laws. 321 With respect to the $35,000 payment, NASD's outside Delaware counsel stated that the language in Article 4 of NASD's Certificate of Incorporation tracks that of the Internal Revenue Code in that no part of the organization's net earnings may inure to the benefit of any private shareholder or individual. 322 NASD's outside Delaware counsel stated that any action in contravention of the Internal Revenue Code's prohibition on inurement would also be in contravention of the prohibition against inurement set forth in NASD's Certificate of Incorporation and thus would be void under Delaware law. 323 With respect to the 30-day timeframe, NASD's outside Delaware counsel confirmed NASD's analysis that Article XVI of the NASD By-Laws provides a non-exclusive means by which member approval of amendments to the By-Laws can be obtained. 324 321 *See* RLF Letter, *supra* note 5. 322 *Id.* at 4-5. 323 *Id.* at 5. 324 *See* RLF Letter and NASD Response Letter, *supra* note 5. The Commission ordinarily does not make determinations regarding state law issues but, when required to do so because state law necessarily informs its findings under the Exchange Act, it relies on the conclusions of experts or other authorities. In this regard, the Commission has relied on analysis by NASD's Delaware counsel that the vote of NASD's members at the special meeting approving the proposed amendments to the By-Laws “was a valid exercise of the Member's franchise rights and authorized by Delaware law.” 325 With respect to the adequacy of the proxy statement, the Commission has considered the NASD's explanation regarding the proxy statement's representations about the $35,000 payment. The Commission believes that NASD has made a prima facie showing that these representations were not misleading and that NASD's explanation is uncontradicted by the commenters' submissions regarding this matter. Accordingly, after reviewing the record in this matter, the Commission believes that NASD has provided sufficient basis on which the Commission can find that, under the Exchange Act, NASD complied with its Certificate of Incorporation and By-Laws with respect to the proxy approval process and that the proposed amendments to its By-Laws were properly approved by NASD members. 325 *See* RLF Letter, *supra* note 5. D. Approval of NASD Regulation By-Laws The NASD Regulation By-Laws contain provisions that conflict with the proposed amendments to the NASD By-Laws. 326 Accordingly, NASD proposes to conform those provisions of the NASD Regulation By-Laws to the relevant provisions in the New SRO By-Laws. Because the proposed NASD Regulation By-Law changes conform to and reflect the proposed governance structure set forth in the New SRO By-Laws, the Commission finds that the amendments to the NASD Regulation By-Laws are consistent with the Exchange Act. 326 *See* Section II.D.6, *supra* , for a description of these provisions. E. Efficiency and Investor Protection Some commenters explicitly questioned the benefits of the proposed consolidation, 327 and other commenters noted that having one less regulator overseeing the securities firms that deal with the public would harm investors. 328 NASD stated that the consolidation is intended, among other things, to increase efficient, effective, and consistent regulation of securities firms, provide cost savings to securities firms of all sizes, and strengthen investor protection and market integrity. NASD also stated that the consolidation would streamline the broker-dealer regulatory system, combine technologies, and permit the establishment of a single set of rules and a single set of examiners with complementary areas of expertise within a single SRO. The Commission believes that NASD's expectations are reasonable. In the Commission's view, the consolidation of NASD and NYSE member firm regulation is intended to help reduce unnecessary regulatory costs while, at the same time, increase regulatory effectiveness and further investor protection. The Commission notes that the Transaction holds the potential to reduce unnecessary regulatory costs because New SRO firms would deal with only one group of examiners and one enforcement staff for member firm regulation. 327 *See* RKeenan Letter I, Mayfield Letter, and Schooler Letter. 328 *See* King Letter, Eitel Letter II, de Leeuw Letter, Elish Letter, Patterson Letter, Biddick Letter, and Massachusetts Letter. F. Arbitration Section 15A(b)(6) of the Exchange Act 329 provides that the rules of an association must be designed, among other things, to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and, in general, to protect investors and the public interest. The Commission finds that NASD's proposal to consolidate the NASD and NYSE arbitration forums is consistent with the Act because it will maintain a fair arbitration forum available for all NYSE arbitration claims, while continuing to maintain a fair forum for NASD claims and claims that it already administers on behalf of other SROs. 330 Merging the NYSE arbitration program with the NASD arbitration program takes advantage of economies of scale, particularly in light of the NYSE's comparatively small caseload. Moreover, as NASD noted, it has a decade of experience in administering arbitrations on behalf of other SROs. 329 15 U.S.C. 78o-3(b)(6). 330 In considering proposed arbitration rules and rule changes, the Commission considers their effect on the fairness of the forum. *See generally* Securities Exchange Act Release No. 55158 (January 24, 2007). *See also* Section 15A(b)(6) of the Exchange Act. Commenters' suggestions for creating a separate securities arbitration forum, or providing that public investors may choose between resolving their disputes in court or in arbitration, are outside the scope of the proposed rule change. The Commission notes, however, that the Supreme Court upheld the use of pre-dispute arbitration agreements to resolve securities disputes in *Shearson/American Express, Inc.* v. *McMahon* 331 and subsequent cases. 331 482 U.S. 220 (1987). NASD has the ability to impose sanctions against its members for failing to submit a dispute to arbitration, failing to comply with provisions of the NASD Code of Arbitration Procedure for Customer Disputes, and failing to honor an award. 332 In light of the policy supporting arbitration evinced by the Federal Arbitration Act 333 and Supreme Court precedent upholding securities industry arbitration agreements, 334 and the requirements of Section 19(b)(2) of the Exchange Act, the Commission cannot find as a matter of law that consolidation of the NASD and NYSE arbitration forums must be conditioned on providing customers with a choice of another dispute resolution forum. 332 NASD Rule IM-12000. 333 9 U.S.C. 1-14. 334 In 1987, the Supreme Court decided *Shearson/American Express, Inc.* v. *McMahon* , 482 U.S. 222 (1987), which determined that customers who sign predispute arbitration agreements with their brokers may be compelled to arbitrate claims arising under the Exchange Act. In a companion case, *Perry* v. *Thomas* , 482 U.S. 483 (1987), the Court concluded that an employee of a broker-dealer could be compelled to arbitrate disputes by virtue of the employee having signed a Form U-4 and because the NYSE had rule in place requiring arbitration. Two years later, the Supreme Court applied the reasoning of *McMahon* to compel arbitration of claims arising under the Securities Act of 1933. *Rodriguez de Quijas* v. *Shearson/American Express, Inc.* , 490 U.S. 477 (1989). Thereafter, in *Gilmer* v. *Interstate/Johnson Lane, Corp.* , 500 U.S. 20 (1991), the Supreme Court determined that statutory civil rights claims may be subject to compulsory arbitration, provided that a valid arbitration agreement exists between the registered representative and the firm. Specifically, the *Gilmer* Court stated that “by agreeing to arbitrate a statutory claim, a party does not forgo the substantive rights afforded by the statute; it only submits to their resolution in an arbitral, rather than a judicial forum.” *Id.* at 26 (quoting *Mitsubishi Motors Corp.* v. *Soler Chrysler-Plymouth, Inc.* , 473 U.S. 614, 628 (1985)). The Court stressed that “so long as the prospective litigant effectively may vindicate [his or her] statutory cause of action in the arbitral forum, the statute will continue to serve both its remedial and deterrent function.” *Id.* at 28 (quoting *Mitsubishi Motors Corp.* v. *Soler Chrysler-Plymouth, Inc.* , 473 U.S. 614, 637 (1985)). NASD has committed to consider the comments regarding the use of dispositive motions in connection with its pending rule filing in this area. 335 With respect to other comments concerning the classification of arbitrators, NASD stated that it is working with the NYSE to harmonize their rules and that any resulting rule changes will be filed for Commission consideration, subject to notice and comment. 336 335 NASD Dispute Resolution Letter II, *supra* note 5. 336 *Id.* VI. Conclusion *It is therefore ordered* , pursuant to Section 19(b)(2) of the Exchange Act, that the proposed rule change (SR-NASD-2007-023) is approved. By the Commission. Nancy M. Morris, Secretary. EXHIBIT A—List of Comment Letters as of July 16, 2007 1. Letter from Franco Mortarotti, Zermatt Capital Management, dated December 11, 2006 (“Mortarotti Letter”). 2. Letter from Samuel F. Lek, Lek Securities Corporation, to Christopher Cox, Chairman, Commission, dated December 15, 2006 (“Lek Letter”). 3. Letter from Mary S. Darcy, Managing Partner, The Darcy Group LLC, dated December 21, 2006 (“Darcy Letter”). 4. Letter from Michael Jordan, Control Officer/Securities Industry, dated April 4, 2007 (“Jordan Letter”). 5. Letter from Joseph Kosinsky, NASD Member, dated April 2, 2007 (“Kosinsky Letter”). 6. Letter from Judith Schapiro, dated March 30, 2007 (“Judith Schapiro Letter”). 7. Letter from Daniel W. Roberts, NASD District One Committee Member, dated March 29, 2007 (“Roberts Letter”). 8. Letter from Charles Botzum, III, dated March 29, 2007 (“Botzum Letter”). 9. Letter from John B. Busacca, III on behalf of North American Clearing, Inc., The Financial Industry Association, dated March 28, 2007 (“Busacca Letter”). 10. Letters from Robert Keenan, CEO, St Bernard Financial Services, Inc., dated March 28, 2007 and April 13, 2007 (“RKeenan Letter I” and “RKeenan Letter II,” respectively). 11. Letter from Bob and Linda King, dated April 7, 2007 (“King Letter”). 12. Letter from Joel Blumenschein, President, EZ Stocks, Inc., dated March 29, 2007 (“Blumenschein Letter”). 13. Letter from Peter J. Chepucavage, General Counsel, Plexus Consulting, dated March 26, 2007 (on behalf of the International Association of Small Broker Dealers and Advisers) (“IASBDA Letter”). 14. Letter from Donald R. Hawks, Commander, Retired, USN; President, Registered Principal, Alpha Business Control Systems Inc., dated March 28, 2007 (“Hawks Letter”). 15. Letter from the Public Members of the Securities Industry Conference on Arbitration to Christopher Cox, Chairman, Commission, dated January 12, 2007 (“SICA Public Members Letter”). 16. Letter from Gretchen Harriman-Thiessen to Christopher Cox, Chairman, Commission, dated April 4, 2007 (“Harriman-Thiessen Letter”). 17. Letters from Les Greenberg, Attorney, Law Offices of Les Greenberg, to Nancy M. Morris, Secretary, Commission, dated April 8, 2007 and April 11, 2007 (“Greenberg Letter I” and “Greenberg Letter II,” respectively). 18. Letter from Ari Gabinet, Principal, Securities Regulation, The Vanguard Group, Inc., to Nancy M. Morris, Secretary, Commission, dated April 11, 2007 (“Vanguard Letter”). 19. Letter from Douglas W. Schriner, CEO, Harrison Douglas, Inc., dated April 11, 2007 (“Schriner Letter”). 20. Letter from Gary L. Flater, CEO, dated April 12, 2007 (“Flater Letter”). 21. Letter from Chester Hebert, President, CIM Securities, LLC, to the Commissioners, dated April 12, 2007 (“Hebert Letter”). 22. Letter from Luke C. Schunk, Registered Representative, dated April 12, 2007 (“Schunk Letter”). 23. Letter from Eric B. Arnold, President, Fenwick Securities, Inc., dated April 12, 2007 (“Arnold Letter”). 24. Letter from Kevin J. High, Managing Director, dated April 12, 2007 (“High Letter”). 25. Letters from Mary M. Eitel dated April 12, 2007 and April 16, 2007 (“Eitel Letter I” and “Eitel Letter II,” respectively). 26. Letter from Martin J. Cohen, dated April 12, 2007 (“Cohen Letter”). 27. Letter from Sennett Kirk, Kirk Securities Corporation, dated April 12, 2007 (“Kirk Letter”). 28. Letter from Alan Vande Weerd, CFP, Eagle One Investments, LLC, dated April 12, 2007 (“Vande Weerd Letter”). 29. Letters from Jack D. Jester, to Nancy M. Morris, Secretary, Commission, dated April 5, 2007 and June 4, 2007 (“Jester Letter I” and “Jester Letter II,” respectively). 30. Letter from Francis D. de Leeuw, dated April 13, 2007 (“de Leeuw Letter”). 31. Letter from Jerome S. Keenan, Vice President, International Equities Services Inc., dated April 13, 2007 (“JKeenan Letter”). 32. Letter from Wayne A. Schultz, Esq., dated April 13, 2007 (“Schultz Letter”). 33. Letter from Peter M. Elish, President, Elish Elish, Inc., dated April 13, 2007 (“Elish Letter”). 34. Letter from Edward A. H. Siedle, President, Benchmark Financial Services, Inc., to Christopher Cox, Chairman, Commission, dated April 13, 2007 (“Benchmark Letter”). 35. Letter from Jonathan W. Cuneo, and Richard D. Greenfield, dated May 4, 2007 and June 11, 2007, with attachments (“Benchmark/Standard Letter I” and “Benchmark/Standard Letter,” respectively, and, collectively, the “Benchmark/Standard Letters”). 36. Letter from Tom Hanson, VP of Operations and Compliance, dated April 13, 2007 (“Hanson Letter”). 37. Letter from Warren R. Horney, Vice President, WFP Securities Corporation, dated April 13, 2007 (“Horney Letter”). 38. Letter from Dan Mayfield, dated April 13, 2007 (“Mayfield Letter”). 39. Letter from Sam P. Solomon, dated April 13, 2007 (“Solomon Letter”). 40. Letter from Ronald Patterson, President, Southcoast Investment Group Inc., to Christopher Cox, Chairman, Commission, dated April 13, 2007 (“Patterson Letter”). 41. Letter from Steven B. Caruso, President, Public Investors Arbitration Bar Association, dated April 16, 2007 (“Caruso Letter”). 42. Letter from Mark S. Casady, Chairman and Chief Executive Officer, Linsco/Private Ledger Financial Services, to Nancy M. Morris, Secretary, Commission, dated April 16, 2007 (“Casady Letter”). 43. Letter from Charlie Cray, Director, Center for Corporate Policy, dated April 16, 2007 (“Cray Letter”). 44. Letter from Ira D. Hammerman, Senior Managing Director and General Counsel, Securities Industry and Financial Markets Association (“SIFMA”), to Nancy M. Morris, Secretary, Commission, dated April 16, 2007 (“SIFMA Letter”). 45. Letter from I. P. Daily, dated April 15, 2007 (“Daily Letter”). 46. Letter from Albert Kramer, President of Kramer Securities Corporation, dated April 16, 2007 (“Kramer Letter”). 47. Letter from E. John Moloney, President and Chief Executive Officer, Moloney Securities Co., Inc., dated April 16, 2007 (“Moloney Letter”). 48. Letter from David Stringer, President, Prospera Financial Services, Inc., to Nancy M. Morris, Secretary, Commission, dated April 16, 2007 (“Stringer Letter”). 49. Letter from Deborah Castiglioni, Chief Executive Officer, Cutter & Company, to Nancy M. Morris, Secretary, Commission, dated April 16, 2007 (“Castiglioni Letter”). 50. Letter from Bonnie K. Wachtel, dated April 16, 2007 (“Wachtel Letter”). 51. Letter from Lisa Roth, Chairman, National Association of Independent Broker/Dealers (“NAIBD”), to Nancy M. Morris, Secretary, Commission, dated April 16, 2007 (“NAIBD Letter”). 52. Letter from William C. Alsover, Chairman, Centennial Securities Company, LLC, to Nancy M. Morris, Secretary, Commission, dated April 16, 2007 (“Alsover Letter”). 53. Letter from Craig M. Biddick, President, Mission Securities Corp., dated April 16, 2007 (“Biddick Letter”). 54. Letter from Donald R. Penrod, President, Penrod and Company, dated April 16, 2007 (“Penrod Letter”). 55. Letter from Howard Spindel, Senior Managing Director, Integrated Management Solutions USA, LLC, to Nancy M. Morris, Secretary, Commission, dated April 16, 2007 (“Spindel Letter”). 56. Letter from William A. Johnstone, President and CEO, D.A. Davidson & Co., to Nancy M. Morris, Secretary, Commission, dated April 16, 2007 (“Johnstone Letter”). 57. Letter from David Isolano, Chief Executive Officer, Max International Broker Dealer Corp., dated April 16, 2007 (“Isolano Letter”). 58. Letters from Kathryn L. Lundgren, dated April 16, 2007 (“Lundgren Letter I”) and April 17, 2007 (“Lundgren Letter II”). 59. Letter from Gary L. Haney, Chief Executive Officer, United Insurance Group, Inc., dated April 14, 2007 (“Haney Letter”). 60. Letter from John E. Schooler, President, WFP Securities, dated April 13, 2007 (“Schooler Letter”). 61. Letter from Corey N. Callaway, President, Callaway Financial Services, Inc., dated April 13, 2007 (“Callaway Letter”). 62. Letters from Johnny Q. Member, to Nancy M. Morris, Secretary, Commission, dated April 16, 2007, with attachments (“Johnny Q. Member Letter I” and “Johnny Q. Member Letter II,” respectively). 63. Letter from John Q., NASD Member, dated April 13, 2007 (“John Q. Letter”). 64. Letters from Mike Miller, President, Miller Financial Corp., dated April 15, 2007, with attachment (“Miller Letters” collectively). 65. Letter from Dale E. Brown, Executive Director and CEO, Financial Services Institute, to Nancy M. Morris, Secretary, Commission, dated April 16, 2007 (“FSI Letter”). 66. Letter from William R. Pictor, President, Trubee, Collins & Co., Inc., to Nancy M. Morris, Secretary, Commission, dated April 16, 2007 (“Pictor Letter”). 67. Letter from Walter S. Robertson, III, President and CEO, Scott & Stringfellow, Inc., to Nancy M. Morris, Secretary, Commission, dated April 16, 2007 (“Robertson Letter”). 68. Letter from M. LaRae Bakerink, CEO, WBB Securities, LLC, to Christopher Cox, Chairman, Commission, dated April 16, 2007 (“Bakerink Letter”). 69. Letter from William F. Galvin, Secretary of the Commonwealth, Commonwealth of Massachusetts, to Nancy M. Morris, Secretary, Commission, dated April 18, 2007 (“Massachusetts Letter”). 70. Letter from Joseph P. Borg, President, North American Securities Administrators Association, Inc., and Director, Alabama Securities Commission, to Nancy M. Morris, Secretary, Commission, dated April 17, 2007 (“NASAA Letter”). 71. Letter from Joan Hinchman, Executive Director, President and CEO, National Society of Compliance Professional Inc., to Nancy M. Morris, Secretary, Commission, dated April 26, 2007 (“NSCP Letter”). 72. Letter from Michael J. Mungenast, CEO and President, Proequities, to Nancy M. Morris, dated April 23, 2007 (“Mungenast Letter”). [FR Doc. E7-14855 Filed 7-31-07; 8:45 am] BILLING CODE 8010-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-56146; File No. SR-NASD-2007-053] Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; Notice of Filing and Order Granting Accelerated Approval of Proposed Rule Change Relating to the Restated Certificate of Incorporation of National Association of Securities Dealers, Inc. July 26, 2007. Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”) 1 and Rule 19b-4 thereunder, 2 notice is hereby given that on July 24, 2007, the National Association of Securities Dealers, Inc. (“NASD”) filed with the Securities and Exchange Commission (“SEC” or “Commission”) the proposed rule change to amend the Restated Certificate of Incorporation of NASD (“Certificate”) as described in Items I and II below, which Items have been substantially prepared by NASD. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons and is simultaneously approving the proposal on an accelerated basis. 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b-4. I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change NASD proposes to amend its Certificate to reflect the governance and related changes proposed by NASD to accommodate the consolidation of the member firm regulatory functions of NASD and NYSE Regulation, Inc. and to conform the Certificate to the amended NASD By-Laws. The proposed amendments to the Certificate also reflect NASD's change in corporate name to Financial Industry Regulatory Authority, Inc. (“FINRA”) as of the closing of the Transaction (defined below). The text of the proposed rule change, including the Certificate, is available at NASD, the Commission's Public Reference Room, and *http://nasd.complinet.com.* II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, NASD included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item III below. NASD has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose On November 28, 2006, NASD and the NYSE Group, Inc. (“NYSE Group”) announced a plan to consolidate their member regulation operations into a combined organization (“Transaction”) that will be the sole U.S. private-sector provider of member firm regulation for securities firms that conduct business with the public. This consolidation will streamline the broker-dealer regulatory system, combine technologies, permit the establishment of a single set of rules and group examiners with complementary areas of expertise in a single organization—all of which will serve to enhance oversight of U.S. securities firms and help ensure investor protection. Moreover, NASD notes that the new organization will be committed to reducing regulatory costs and burdens for firms of all sizes through greater regulatory efficiency. On January 19, 2007, NASD held a special meeting of the members of NASD eligible to vote on amendments to the NASD By-Laws. A quorum of members entitled to vote on the matter was present, in person or by proxy, at such meeting, and a majority of the quorum approved the amendments to the NASD's By-Laws. On March 19, 2007, NASD filed with the Commission a proposed rule change to amend the NASD By-Laws to implement the governance and related changes to accommodate the consolidation of the member regulatory functions of NASD and NYSE Regulation, Inc. 3 3 *See* Securities Exchange Act Release No. 55495 (March 20, 2007), 72 FR 14149 (March 26, 2007) (SR-NASD-2007-023). Today, the Commission approved the amendments to NASD's By-Laws proposed in connection with the Transaction. *See* Securities Exchange Act Release No. 56145 (July 26, 2007) (“Release No. 34-56145”). The purpose of this proposed rule change is to make the necessary amendments to the Certificate to reflect the governance and related changes in connection with the Transaction, the related changes to the NASD By-Laws, and NASD's change in corporate name to FINRA as of the date of closing of the Transaction. 4 4 Article XXII, Section 3 of the NASD By-Laws, as amended in Release 34 -56145, *supra* note 3, addresses the term of office of Governors for a transitional period commencing on the date of closing of the Transaction and ending on the third anniversary of the date of closing. Among other things, Article XXII, Section 3 provides that “* * * in the event the remaining term of office of any Large Firm, Mid Size Firm or Small Firm Governor position that becomes vacant is for more than 12 months, *nominations shall be made as set forth above in this paragraph,* but such vacancy shall be filled by the members entitled to vote thereon at a meeting thereof convened to vote thereon (emphasis added).” Article Eleventh of the Certificate does not reiterate the applicable nomination process in such instances, insofar as the text solely restates those persons entitled to make nominations as reflected elsewhere in Article Eleventh. In short, in filling any such vacancies, NASD represents that the nominations will be made in accordance with the provisions of Article XXII, Section 3 of the amended NASD By-Laws. The effective date of the proposed rule change will be the closing of the Transaction. The proposed rule change will not become effective if the Transaction does not close. 2. Statutory Basis NASD believes that the proposed rule change is consistent with the provisions of section 15A of the Act, 5 including section 15A(b)(2) of the Act, 6 in that it will permit FINRA to carry out the purposes of the Act, to comply with the Act, and to enforce compliance by FINRA members, and persons associated with FINRA members, with the Act, the rules and regulations thereunder, and FINRA rules. 5 15 U.S.C. 78 *o* -3. 6 15 U.S.C. 78o-3(b)(2). B. Self-Regulatory Organization's Statement on Burden on Competition NASD does not believe that the proposed rule change will result in any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others Written comments were neither solicited nor received. III. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change 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 *rule-comments@sec.gov.* Please include File Number SR-NASD-2007-053 on the subject line. Paper Comments • Send paper comments in triplicate to Nancy M. Morris, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090. All submissions should refer to File Number SR-NASD-2007-053. 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, 100 F Street, NE., Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. Copies of such filing also will be available for inspection and copying at the principal office of NASD. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-NASD-2007-053 and should be submitted on or before August 22, 2007. IV. Commission Findings After careful consideration, the Commission finds that the proposed rule change is consistent with the Act and the rules and regulations thereunder applicable to a national securities association. 7 Specifically, the Commission believes that the proposal is consistent with section 15A(b)(2) of the Act 8 in that it will permit FINRA to be so organized to carry out the purposes of the Act, to comply with the Act and to enforce compliance by FINRA members and persons associated with members with the Act, the rules and regulations thereunder, and FINRA rules. Further, the Commission finds that the proposed rule change is consistent with section 15A(b)(6) of the Act 9 in that it is designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and, in general, to protect investors and the public interest. 7 In approving this proposed rule change, the Commission has considered the proposed rule's impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f). 8 15 U.S.C. 78 *o* -3(b)(2). 9 15 U.S.C. 78 *o* -3(b)(6). The proposed rule change amends the Certificate to conform to the changes in the NASD By-Laws that the Commission is approving today, and to reflect the NASD's new name, FINRA. 10 Specifically, the amended Certificate incorporates the governance structure in FINRA's By-Laws, as approved today, including with respect to the three-year transitional period and thereafter. The proposed revisions to the Certificate do not make changes to the governance of FINRA not already contemplated by the proposed changes to FINRA's By-Laws, which were published for comment and approved by the Commission. 11 The Commission believes that the proposed changes to the Certificate are consistent with the Act. 10 *See* Release No. 34-56145, *supra* note 3. 11 *Id.* The Commission finds good cause to approve the proposal prior to the thirtieth day after the proposal was published for comment in the **Federal Register** . This approval allows the proposed rule change to take effect without delay. The proposed revisions to the Certificate do not make changes to the governance of FINRA not already contemplated by the proposed changes to FINRA's By-Laws, which were published for comment and approved by the Commission. 12 Therefore, interested persons were provided the opportunity to submit comments on essentially identical changes. For this reason, the Commission finds good cause, consistent with section 19(b)(2) of the Act, to grant accelerated approval to the proposed changes to the Certificate. 12 *Id.* The Commission finds good cause, consistent with section 19(b)(2) of the Act, to grant accelerated approval to the proposed change of the NASD's name to FINRA because it is technical and does not impact members or other market participants. V. Conclusion *It is therefore ordered,* pursuant to section 19(b)(2) of the Act, that the proposed rule change (SR-NASD-2007-053) is hereby approved on an accelerated basis. 13 13 15 U.S.C. 78s(b)(2). By the Commission. Nancy M. Morris, Secretary. [FR Doc. E7-14856 Filed 7-31-07; 8:45 am] BILLING CODE 8010-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-56125; File No. SR-NSCC-2007-09] Self-Regulatory Organizations; The National Securities Clearing Corporation; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Relating to Use of the National Settlement Service July 24, 2007. Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”), 1 notice is hereby given that on May 1, 2007, The National Securities Clearing Corporation (“NSCC”) filed with the Securities and Exchange Commission (“Commission”) the proposed rule change as described in Items I, II, and III below, which items have been prepared primarily by NSCC. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. 1 15 U.S.C. 78s(b)(1). I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change The proposed rule change permits NSCC to use the Federal Reserve Bank's National Settlement Service (“NSS”) for the settlement of net-net credit balances. II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, NSCC included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. NSCC has prepared summaries, set forth in sections (A), (B), and

(C)below, of the most significant aspects of such statements. 2 2 The Commission has modified parts of these statements.

(A)Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In 2003, as part of a larger initiative to create a centralized settlement system with its affiliate, The Depository Trust Company (“DTC”), NSCC required the use of NSS as the vehicle for all Settling Banks to satisfy their end of day net-net debits. 3 In an effort to increase the efficiencies afforded by NSS, NSCC in conjunction with DTC is now modifying its rules to permit NSCC's use of NSS to distribute net-net credits. 4 Utilizing NSS as the payment mechanism for net-net credits will eliminate the need for NSCC to initiate wire payments for settlement monies owed by NSCC. However, should NSS not be available for any reason, NSCC will retain the capability to satisfy its settlement obligations using wire transfer. 3 Securities Exchange Act Release No. 48744 (November 10, 2003), 68 FR 63831 (November 4, 2003) (File Nos. SR-NSCC-2003-19 and SR-DTC-2003-11). 4 DTC has submitted a similar proposed rule change (File No. SR-DTC-2007-08) providing for the use of NSS for the distribution of net credits. The proposed rule change is consistent with the requirements of section 17A of the Act and the rules and regulations thereunder because it will not affect the safeguarding of funds or securities in NSCC's custody and control or for which it is responsible.

(B)Self-Regulatory Organization's Statement on Burden on Competition NSCC does not believe that the proposed rule change would have any impact or impose any burden on competition.

(C)Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others Written comments relating to the proposed rule change have not yet been solicited or received. NSCC will notify the Commission of any written comments received by NSCC. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action The foregoing rule change has become effective pursuant to section 19(b)(3)(A)(iii) of the Act 5 and Rule 19b-4(f)(4) 6 promulgated thereunder because the proposal effects a change in an existing service of NSCC that

(A)does not adversely affect the safeguarding of securities or funds in the custody or control of NSCC or for which it is responsible and

(B)does not significantly affect the respective rights or obligations of NSCC or persons using the service. At any time within sixty days of the filing of the proposed rule change, the Commission could have summarily abrogated such rule change if it appeared to the Commission that such action was necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. 5 15 U.S.C. 78s(b)(3)(A)(iii). 6 17 CFR 240.19b-4(f)(4). IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change 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 *rule-comments@sec.gov* . Please include File Number SR-NSCC-2007-09 on the subject line. Paper Comments • Send paper comments in triplicate to Nancy M. Morris, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090. All submissions should refer to File Number SR-NSCC-2007-09. 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, 100 F Street, NE., Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. Copies of such filing also will be available for inspection and copying at the principal office of NSCC. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-NSCC-2007-09 and should be submitted on or before August 22, 2007. For the Commission by the Division of Market Regulation, pursuant to delegated authority. 7 7 17 CFR 200.30-3(a)(12). Florence E. Harmon, Deputy Secretary. [FR Doc. E7-14835 Filed 7-31-07; 8:45 am] BILLING CODE 8010-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-56140; File No. SR-NYSE-2007-55] Self-Regulatory Organizations; New York Stock Exchange LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change, as Modified by Amendment No. 1 Thereto, Relating to Rule 106 (Specialists' Contact With Listed Companies and Member Organizations) July 26, 2007. Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”) 1 and Rule 19b-4 thereunder, 2 notice is hereby given that on June 28, 2007, the New York Stock Exchange LLC (“NYSE” or “Exchange”) filed with the Securities and Exchange Commission (“Commission”) the proposed rule change as described in Items I and II below, which Items have been substantially prepared by the Exchange. NYSE filed the proposal pursuant to section 19(b)(3)(A) of the Act 3 and Rule 19b-4(f)(6) thereunder, 4 which renders the proposal effective upon filing with the Commission. On July 25, 2007, the Exchange submitted Amendment No. 1 to the proposed rule change. The Commission is publishing this notice to solicit comments on the proposed rule change, as amended, from interested persons. 1 15 U.S.C. 78s(b)(1). 2 7 CFR 240.19b-4. 3 15 U.S.C. 78s(b)(3)(A). 4 17 CFR 240.19b-4(f)(6). I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to amend NYSE Rule 106 (Specialists' Contact with Listed Companies and Member Organizations). The text of the proposed rule change is available at NYSE, the Commission's Public Reference Room, and *http://www.nyse.com.* II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of, and basis for, the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose The Exchange seeks to amend NYSE Rule 106 in order to modify the requirements related to specialist contact with listed companies and with Exchange member organizations. The proposal takes into consideration the reality that a listed company's, or a member organization's, access to electronic information may result in such listed company or member organization declining to have meetings with the specialist. Therefore, the Exchange seeks to amend the rule to require the specialist unit to make itself available for contact with its listed companies and with certain Exchange member organizations. NYSE Rule 106 was adopted at a time when orders entered with the specialist were handled manually, and contact between a specialist unit and its listed companies was necessary to ensure that such listed companies were informed about the trading in its listed security on the Exchange trading floor. 5 As a result, NYSE Rule 106(a) mandates interaction between a specialist unit and representatives of its listed companies. The rule is very specific as to the frequency of contact (quarterly) and the status of the issuer representative with whom the contact must be had (Secretary or higher). Further, the rule mandates that at least one of the quarterly meetings be in person. NYSE Rule 106(a) was intended to help foster a better understanding of the specialist function, the operations of the Exchange market, and the markets that are maintained in the listed company's stock. 5 *See* Securities Exchange Act Release No. 27292 (September 26, 1989), 54 FR 41193 (October 5, 1989) (SR-NYSE-89-13). The Exchange is mindful of the busy schedules kept by the highest ranking corporate employees in listed companies. As such, the Exchange believes that NYSE Rule 106 no longer takes into consideration the possibility that in today's world of electronic messaging, Internet connectivity, and automated trading, a listed company may not need or want the type of contact with their specialist unit that is currently required by NYSE Rule 106(a). In addition to the listed companies' ability to access public information, specialist units have internal departments that are responsible for communicating with its listed companies during the trading day. Specifically, specialist units have corporate relations groups that serve to provide its listed companies with information and are available to answer questions from such listed companies during the trading day. As such, the requirements of NYSE Rule 106(a) are unnecessary since the specialist units are in contact with their listed companies on a daily basis as part of its regular course of business. NYSE Rule 106(a) places the responsibility of contact between the specialist unit and the listed company solely on the proverbial “shoulders” of the specialist unit. If the current requirements of NYSE Rule 106(a) are not met by a specialist unit, it is the specialist unit, and not the listed company, that is in violation of the rule and potentially subject to disciplinary action. Accordingly, the Exchange proposes that NYSE Rule 106(a) be amended to require a specialist unit to make itself available for contact with its listed companies. The proposal would continue to afford listed companies with opportunities for contact with its specialist unit, while removing potential for disciplinary action against a specialist unit that acts as the registered specialist for such listed company that declines to meet or have contact with the specialist unit. Similarly, while NYSE Rule 106(b) was originally designed to foster a better understanding between the specialist units and the Exchange's fifteen largest member organizations through required, semi-annual “off the Exchange Trading Floor” contact, the Exchange believes that NYSE Rule 106(b) no longer reflects the needs of the member organizations. In today's world of electronic messaging, Internet connectivity, and 24-hour news coverage of market activity, a member organization may not want or need the type of contact with a specialist unit that is currently required by NYSE Rule 106(b). The interpersonal relationships between specialists and member organizations that once took front stage in the marketplace have been significantly replaced by automated trading initiatives and computerized market data reports. Moreover, the specialist units are generally in contact with member organizations on a regular basis through electronic and/or telephonic means, which render the requirements of NYSE Rule 106(b) unnecessary. As does the current version of NYSE Rule 106(a), NYSE Rule 106(b) currently places the responsibility of the semi-annual “off the Exchange Trading Floor” contact on the specialist unit, not on the member organization, and if the member organization is unable or chooses not to have such contact with the specialist unit, the specialist unit may be in violation of NYSE Rule 106(b) and potentially subject to disciplinary action. Accordingly, the Exchange proposes to amend NYSE Rule 106(b) to require a specialist unit to “make itself available” semi-annually for “off the Exchange Trading Floor” contact with the fifteen largest member organizations of the Exchange and certain other members. Finally, given the current frequency of contact as described above, the Exchange does not believe that it is necessary for specialist units to provide the Exchange with a record of their contacts. As such, the Exchange further proposes to amend NYSE Rule 106(c) to have the specialist report such contacts to the Exchange upon request of the Exchange. 2. Statutory Basis The proposed rule change is consistent with the requirements of section 6(b) of the Act, 6 in general, and furthers the objectives of section 6(b)(5) of the Act, 7 in particular, because it is designed to promote just and equitable principles of trade, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest. 6 15 U.S.C. 78f(b). 7 15 U.S.C. 78f(b)(5). B. Self-Regulatory Organization's Statement on Burden on Competition The Exchange does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others Written comments on the proposed rule change were neither solicited nor received. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Because the foregoing proposed rule change:

(1)Does not significantly affect the protection of investors or the public interest;

(2)does not impose any significant burden on competition; and

(3)by its terms does not become operative for 30 days after the date of this filing, or such shorter time as the Commission may designate if consistent with the protection of investors and the public interest, the proposed rule change has become effective pursuant to section 19(b)(3)(A) of the Act 8 and Rule 19b-4(f)(6) thereunder. 9 8 15 U.S.C. 78s(b)(3)(A). 9 17 CFR 240.19b-4(f)(6). A proposed rule change filed under Rule 19b-4(f)(6) normally does not become operative for 30 days after the date of filing. However, Rule 19b-4(f)(6)(iii) permits the Commission to designate a shorter time if such action is consistent with the protection of investors and the public interest. In addition, Rule 19b-4(f)(6)(iii) requires a self-regulatory organization to provide the Commission with written notice of its intent to file the proposed rule change, along with a brief description and text of the proposed rule change, at least five business days prior to the date of filing of the proposed rule change, or such shorter time as designated by the Commission. 10 10 As required under Rule 19b-4(f)(6)(iii), the Exchange provided the Commission with written notice of its intent to file the proposed rule change at least five business days prior to the filing date. *See* 17 CFR 240.19b-4(f)(6)(iii). The Exchange has asked the Commission to waive the 30-day operative delay to allow the Exchange to immediately implement the proposed rule change and avoid any rule violations by specialist units that are unable to fulfill the current obligations of NYSE Rule 106. The Commission believes that waiving the 30-day operative delay is consistent with the protection of investors and the public interest 11 because the proposed rule change to amend NYSE Rules 106(a) and

(b)would continue to foster contact and interaction between the specialist units and the Exchange's listed companies and member organizations, respectively, taking into consideration the contemporary, real-time means of communication, connectivity, and access to information. In addition, the Commission believes that the proposed amendment to NYSE Rule 106(c) is consistent with the requirements of the Act, and the Commission notes that, as proposed, the Exchange would still be able to obtain information regarding contact between the specialist units and their listed companies and certain member organizations upon request. 11 For purposes only of waiving the 30-day operative delay, the Commission has also considered the proposed rule's impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f). At any time within 60 days of the filing of the proposed rule change, the Commission may summarily abrogate such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. 12 12 For purposes of calculating the 60-day period within which the Commission may summarily abrogate the proposed rule change, as amended, under section 19(b)(3)(C) of the Act, the Commission considers the period to commence on July 25, 2007, the date on which the Exchange submitted Amendment No. 1. *See* 15 U.S.C. 78s(b)(3)(C). IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change 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 *rule-comments@sec.gov.* Please include File No. SR-NYSE-2007-55 on the subject line. Paper Comments • Send paper comments in triplicate to Nancy M. Morris, Secretary, Securities and Exchange Commission, Station Place, 100 F Street, NE., Washington, DC 20549-1090. All submissions should refer to File No. SR-NYSE-2007-55. 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, 100 F Street, NE., Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. Copies of such filing will also be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File No. SR-NYSE-2007-55 and should be submitted on or before August 22, 2007. For the Commission, by the Division of Market Regulation, pursuant to delegated authority. 13 13 17 CFR 200.30-3(a)(12). Florence E. Harmon, Deputy Secretary. [FR Doc. E7-14843 Filed 7-31-07; 8:45 am] BILLING CODE 8010-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-56142; File No. SR-NYSE-2007-22] Self-Regulatory Organizations; New York Stock Exchange, LLC.; Notice of Filing of Proposed Rule Change and Amendment No. 1 Thereto Relating to the Harmonization of NYSE and NASD Regulatory Standards, the Updating of Certain NYSE Terminology, and the Reorganization and Clarification of Certain NYSE Rules in Connection With the Harmonization Process July 26, 2007. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”), 1 and Rule 19b-4 thereunder, 2 notice is hereby given that on February 27, 2007, the New York Stock Exchange LLC (“NYSE” or “Exchange”) filed with the Securities and Exchange Commission (“Commission” or “SEC”) the proposed rule change as described in Items I, II, and III below, which Items have been substantially prepared by the Exchange. On July 26, 2007, NYSE filed Amendment No. 1 to the proposed rule change. The Commission is publishing this notice to solicit comments on the proposed rule change, as amended, from interested persons. 1 15 U.S.C 78s(b)(1). 2 17 CFR 240.19b-4. I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change The proposed rule change consists of amendments to NYSE rules, organized categorically, that would advance the process of harmonizing the regulatory standards of the Exchange and the National Association of Securities Dealers, Inc. (“NASD”). In addition, the proposed rule change would update certain terminology and otherwise reorganize and clarify current NYSE regulatory standards. The text of the proposed rule change is available on the Exchange's Web site ( *http://www.nyse.com* ), at the principal office of the Exchange, and at the Commission's Public Reference Room. II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the NYSE included statements concerning the purpose of, and basis for, the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The NYSE has prepared summaries, set forth in Sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization's Statement of the Purpose of, and the Statutory Basis for, the Proposed Rule Change 1. Purpose The Exchange is proposing amendments to certain NYSE Rules pursuant to its SRO Rule Harmonization initiative. In connection with this filing, the Exchange is also separately submitting to the Commission a report that provides an overview of the Exchange's approach in this regard. Introduction Relative to the approval of the NYSE/ARCA merger, 3 the Exchange agreed to initiate a comparison of its regulatory requirements (as prescribed by the NYSE Rulebook and associated interpretive materials) to corresponding NASD regulatory provisions. The purpose of the process was to achieve, to the extent practicable, 4 substantive harmonization of the two regulatory schemes. To that end, this filing proposes amendments to an extensive range of NYSE rules which have been divided into four categories. In addition to organizing the rules conceptually, this serves to distinguish the review and recommendation process that has been applied to each category, discussed more fully below. 3 *See* Securities Exchange Act Release No. 53382 (February 27, 2006) 71 FR 11251 (March 6, 2006) (order approving SR-NYSE-2005-77). 4 The review process recognized the appropriateness of differing standards based upon the differences between the markets and membership of NYSE and NASD. The categories are arranged as follows: Category 1 addresses Member Firm Organization/Structure and Governance; Supervision; Registration, Qualification and Continuing Education; and Sales Practice (collectively, the “Sales Practice Rules”); Category 2 addresses the Financial/Operational Rules; Category 3 addresses the Buy-In Rules; and Category 4 addresses the selective deletion of the term “member” and the complete deletion of the term “allied member” from the NYSE rules (“Member” and “Allied Member” Rules). Global Amendments Category 4 includes rules for which the only substantive proposed change is deletion of the terms “member” and/or “allied member.” Note, however, that the selective deletion of the term “member” and the complete deletion of the term “allied member” is proposed throughout the other three categories as well. These amendments are discussed more fully below under Category 4 (“Member” and “Allied Member” Rules). In brief, the Exchange is proposing to delete, where appropriate, the term “member” throughout the NYSE rules to reflect its revised meaning in light of the recent merger/reorganization of the Exchange. While “member” is still recognized as a categorical designation, its current definition 5 is substantively different from its pre-merger definition, rendering its use in many NYSE rules outdated. Thus, many regulatory requirements that once pertained specifically to NYSE members no longer apply at all, or apply to members only in their capacity as member organization employees. 5 The term “member” currently refers to an employee of a member organization authorized to effect transactions on the Floor of the Exchange on behalf of such member organization, which holds a license to so trade. The “allied member” designation is a regulatory category based on a person's “control” over a member organization. 6 It is proposed that the term be simply deleted in rules where a person's control status is not relevant to the rule's application. In contexts where an individual's status as a member organization “control person” has regulatory relevance, the Exchange proposes to substitute the newly defined category of “principal executive” ( *see* proposed Rule 416A amendments, below). Unlike the “allied member” designation, the “principal executive” designation would not require a registration process, but would be used only for regulatory reporting and notification purposes. 6 *See* subsection

(b)of NYSE Rule 304 (“Allied Members and Approved Persons”). Category 1 (“Sales Practice Rules”) Background In order to initiate the rule harmonization process, the Exchange enlisted, through its Compliance Advisory Group (“CAG”), 7 the assistance of several securities industry regulatory professionals from member organizations who volunteered to participate in various subcommittees in order to conduct an initial review of all relevant materials and to report their findings and recommendations to the Exchange and the NASD (collectively, the “SROs”). The SROs were charged with the responsibility of considering the appropriateness of the committees' recommendations and working together to amend their respective rules accordingly. 7 The Exchange's Compliance Advisory Group is a committee consisting of representatives from the Exchange Member Firm Regulation Division as well as legal and compliance personnel from a cross-section of the NYSE member organization community. CAG meets on a periodic basis, generally monthly, to discuss regulatory and compliance matters of interest to the securities industry. The review process formally began in February 2006 when the Exchange's Member Firm Regulation (“MFR”) Division, in conjunction with the CAG, organized four subcommittees and assigned each a group of rules within a specified regulatory category. The following four subcommittees were thus established:

(1)Member Firm Organization/Structure and Governance;

(2)Supervision;

(3)Registration, Qualification and Continuing Education; and

(4)Sales Practice. Representatives from the Exchange, the NASD, and the Securities Industry Association (“SIA”) 8 participated throughout this review process in a consultative role. 9 The recommendations that resulted from these subcommittees' comparison of NYSE and NASD rules are, in large part, the basis for the Category 1 amendment proposals presented herein. 8 Note that SIA has since combined with the Bond Market Association to form the Securities Industry and Financial Markets Association (“SIFMA”). 9 NASD did not participate in the Member Firm Organization/Structure and Governance Subcommittee. The subcommittee review process essentially consisted of identifying inconsistencies between the NYSE rules and the NASD rules, determining which SRO standard made more regulatory sense, and then recommending rule changes that would either conform an NYSE standard to its NASD counterpart or vice versa. In some instances, the subcommittees recommended a hybrid approach that included amendments to corresponding rules of both SROs. Each of the recommendations has been reviewed with the CAG Group and the NASD. These subsequent discussions allowed further exploration of the issues raised by the subcommittees and provided a better sense for which recommendations clearly warrant redress via the formal rule amendment process and which require further consideration. 10 10 *See* NYSE Report submitted in conjunction with this filing for a further discussion and enumeration of such rules. The Exchange has also taken the opportunity, where appropriate, to reorganize and clarify rule text related to the subcommittees' recommendations and to otherwise update, refine and clarify its regulatory standards. Rule 311 Formation of Member Organizations NYSE Rule 311 governs the formation and approval of member organizations by the Exchange. The proposed amendments to Rule 311(b) would extend the application of the rule, which currently addresses partnerships and corporations, to include any type of entity ( *e.g.* , a limited liability company) applying to the Exchange to become a member organization. The proposed amendments would delete subsection (b)(7) of Rule 311 which requires every employee who is associated as a member with a member organization to be designated with a title, such as vice president, consistent with such person's responsibilities and the usage of titles within such organization. Additionally, the amendments propose the deletion of subsection

(h)which prescribes the number of partners to be named in a member organization in order for it to conduct business. These two provisions are being deleted as they are outdated and no longer necessary in light of the current spectrum of NYSE member organizations business models. Rule 313 Submission of Partnership Articles—Submission of Corporate Documents NYSE Rule 313 requires member organizations to submit to the Exchange for approval certain documents which establish a partnership's or corporation's existence. The proposed amendments to Rule 313 add limited liability agreements to the enumeration of documents required to be submitted to and approved by the NYSE in order for an entity to be a member organization. The proposed amendments to Rule 313 also amend .23 of the supplementary material to provide that all corporations, not just those organized under the laws of the State of New York, shall subject themselves to the restrictions set forth in .23. Rule 322 (Guarantees by, or Flow Through Benefits for Members or Member Organizations) Rule 322.10 currently requires each member organization to provide written notice to the Exchange prior to:

(1)Guaranteeing, endorsing or assuming, directly or indirectly, the obligations of another person or

(2)receiving flow-through capital benefits. The practice by member organizations of guaranteeing the liabilities of other persons has long been recognized as a matter that gives rise to special risks with respect to the member organization's capital. Accordingly, as a matter of practice, the Exchange has carefully reviewed and vetted such submissions such that the “prior notice” requirement has effectively been treated as a “prior approval” requirement. The proposed amendments would codify this well-established approach by replacing the present requirement that “notice” of at least 10 business days be given to the Exchange prior to entering into an arrangement prescribed by the rule with an explicit requirement that written Exchange approval be obtained prior to the finalization of any such arrangement. The NASD does not currently have an analogue to Rule 322. The Member Firm Organization/Structure and Governance Subcommittee recommended that NASD adopt a similar rule and NASD has taken the recommendation under advisement. Rule 342 (Offices—Approval, Supervision and Control) and its Interpretation Rule 342.13—Acceptability of Supervisors NYSE Rule 342.13(a) currently requires that persons who are to be assigned certain prescribed supervisory responsibilities 11 have a “creditable” three year record as a registered representative or have three years of “equivalent experience” before functioning as a supervisor. 12 11 In this regard, Rule 342.13(a) references Rule 342(d) which requires that “[q]ualified persons acceptable to the Exchange shall be in charge of:

(1)Any office of a member or member organization,

(2)any regional or other group of offices,

(3)any sales department or activity.” 12 Rule 342.13(a) also requires that persons assigned supervisory responsibility pursuant to Rule 342(d) must pass a qualification examination acceptable to the Exchange that demonstrates competence relevant to assigned responsibilities. The Exchange proposes that Rule 342.13(a) be amended to eliminate the prescribed three-year experience requirement for supervisory personnel and conform with the standard outlined in NASD Rule 1014(a)(10)(D) with respect to firms that are submitting an application to become registered as a broker dealer. In addition, as under NASD 1014(a)(10)(D), the proposed amendments would require that supervisory candidates have one year of “direct experience” or two years of “related experience” in the subject area to be supervised. With respect to existing broker dealers, the Exchange believes that, given a member organizations' first hand knowledge of their supervisory candidates, it is reasonable to provide greater flexibility than Rule 342.13(a) currently allows. Accordingly, the proposed amendments would allow member organizations to make informed determinations, on a case-by-case basis, as to the length and type of experience and training required for each supervisory candidate before he or she is deemed sufficiently prepared to assume particular responsibilities. In order to ensure regulatory jurisdiction over all principal executives, and to more closely conform with the standard prescribed under subsection

(a)of NASD Rule 1021 (Registration Requirements) the Exchange proposes new Rule 342.13(c) which would require each person designated by a member organization as a “principal executive,” as that term is defined in Rule 416A, to pass an examination appropriate to the functions to be performed by such person. Rule 342.19—Supervision of Producing Manager NYSE Rule 342.19 currently requires that a person designated to supervise the business of a Producing Manager (a branch office manager, regional/district sales manager, or a person who performs similar functions and that conducts a public business) must be senior to, or otherwise independent of, such Producing Manager. Currently, a component of determining whether such designated person is “otherwise independent” of a Producing Manager is whether the designated person receives an override or other income derived from the Producing Manager's customer activity that represents more than 10% of the designated person's gross income derived from the member organization over the course of a rolling twelve-month period. If the designated person exceeds the 10% threshold, Rule 342.19 requires that “alternate senior or otherwise independent supervision” of the Producing Manager be established. Member organizations have indicated that the “10% override” standard is difficult to calculate within the context of certain compensation models ( *e.g.* , where an override or other compensation may be tied to a formula applicable to the business of the entire branch office and not distinguishable from the Producing Manager's customer activity). Consequently, the Exchange proposes to delete the current Rule 342.19 standard and offer the following alternative: If a designated supervisor receives an override or other income from the production of registered persons subject to his or her supervision, and the gross revenues of any Producing Manager under his or her supervision exceed 10% of the total gross revenue of all registered persons subject to his or her supervision, then the producing manager would be “flagged” for either alternate supervision (as currently required by Rule 342.19) or “heightened supervision,” which is the standard currently utilized by the NASD 3012(a)(C). The Exchange also proposes amending Rule 342.19(a) to add the NASD Rule 3012(a)(2)(C) definition of “heightened supervision.” Thus, proposed Rule 342.19(a) would define “heightened supervision” to mean: “those supervisory procedures that evidence supervisory activities that are designed to avoid conflicts of interest that serve to undermine complete and effective supervision because of the economic, commercial, or financial interests that the supervisor holds in the associated persons and businesses being supervised.” Rule 342.23—Internal Controls The Exchange proposes repositioning text, from Rule 401 to Rule 342.23, which requires internal controls over certain prescribed business activities ( *e.g.* , activities pertaining to the transmittal of funds and securities from customer accounts, changes in customer address, and changes in customer investment objectives). Since Rule 401 text currently refers back to requirements outlined in Rule 342.23, it makes sense to integrate the Rule 401 text into Rule 342.23 for purposes of easy reference and comprehension. Rule 345 (Employees—Registration, Approval, Records) and its Interpretation Adoption of “Assistant Representative” Registration Category The Exchange is proposing amendments to Rule 345(a) and its Interpretation to adopt “assistant representative” as a registration category and to recognize the Series 11 as its prerequisite qualification examination. 13 This is being done to establish a registration category that would allow for the performance of functions not permitted to be performed by a non-registered sales assistant without requiring full Series 7 registration. Specifically, as defined in proposed Rule 345.10, a person registered as an “assistant representative” would be a member organization employee who could accept unsolicited orders for execution by the member organization. An assistant representative would not be permitted to solicit transactions or new accounts on behalf of the member organization, render investment advice, make recommendations to customers regarding the appropriateness of securities transaction, or effect transactions in securities markets on behalf of the member organization. 13 The Commission notes that NASD currently has a similar rule that governs Assistant Representatives. *See* NASD Rules 1041 (Registration Requirements for Assistant Representatives) and 1042 (Restrictions for Assistant Representatives). Further, persons registered in this category may not be registered concurrently in any other category. Member organizations may only compensate assistant representatives on an hourly wage and may not directly or indirectly relate their compensation to the number or size of customer transactions effected. This provision would also prohibit assistant representatives from receiving bonuses or other like compensation related to a member organization's transaction-based activity. Elimination of Prescribed Training Periods for Certain Registered Persons NYSE Rule 345 currently prohibits member organization employees from performing the functions of a registered representative unless such employee is registered, qualified and meets a designated four-month training period. 14 14 *See* Rule 345(a) and Supplementary Material section .15(b)(2). Further, the Interpretation 15 of Rule 345 currently provides that exam-qualified “registered representatives” and “registered options representatives” will not receive Exchange approval to perform functions pursuant to such qualifications without first completing a four-month training period. NASD Rules do not require such training periods. 15 *See* Rule 345.15/2 (“Qualifications—Categories of Registration”) in the *NYSE Interpretation Handbook.* In order to harmonize Rule 345 with the NASD regulatory structure, and to provide member organizations the flexibility to train their registered personnel in a manner appropriate to the duties they will be assuming, the Exchange is proposing amendments to Rule 345 and its Interpretation to eliminate the prescribed four-month training period for registered representatives and for registered options representatives. The proposed amendments would allow member organizations to make informed decisions as to the extent and duration of training for such registered persons before they are permitted to perform functions requiring registration. Similarly, the Exchange is also proposing the elimination of the currently required two-month training period for “limited registration” candidates. 16 16 Limited registration candidates' activities are limited to the solicitation or handling of the sale or purchase of instruments such as investment company securities and variable contracts, insurance premium finding programs, direct participation programs and municipal securities. ( *See* Rule 345.15/02 in the *NYSE Interpretation Handbook* ). Rule 345(b) Rule 345(b) currently prohibits any natural person, other than a member or allied member, to assume the duties of an officer with the power to legally bind such member or member organization unless such member or member organization has filed an application with and received the approval of the Exchange. The Exchange proposes to delete Rule 345(b) in its entirety. Proposed amendments to Rule 416A (see below) would require member organizations to notify the Exchange of all principal executives (defined as the designated principal executive officers of a member organization pursuant to NYSE Rule 311(b)(5) or their functional equivalents). There would no longer be a requirement that the Exchange approve such persons (which is consistent with NASD's regulatory structure). New Rule 345(b) would clarify that no person shall undertake any active duties whose performance requires a qualification examination until such person has satisfactorily met such examination requirement. This is included, in part, to reaffirm the exam qualification requirements applicable to such control persons. 17 17 *See,* for example, Rule 311 and its Interpretation. Training Requirement for Members and Substitute Members The Exchange is proposing new Rule 345(c) which would prohibit any person from becoming active on the Floor as a member or a substitute thereof unless such person has been sufficiently trained under the guidance of an experienced member for such period of time as may be necessary before being permitted to execute orders without supervision. This requirement is proposed to help ensure that persons who will be performing the duties of a member are sufficiently prepared to do so. Adoption of “Qualified Investor” Standard The Interpretation of Rule 345 18 currently allows Floor members and Floor clerks who have successfully completed the Series 7A examination to conduct a public business limited to accepting orders from “professional customers” as that term is defined in the Interpretation. The Exchange is proposing substituting the more generally recognized “qualified investor” standard, as that term is defined under section 3(a)(54) 19 of the Act. 18 *See* Rule 345.15/02 in the *NYSE Interpretation Handbook* . 19 15 U.S.C. 78c(a)(54). Clarification of Employee Background Check Requirements The Exchange is also proposing revised language 20 that reorganizes and clarifies member organization requirements with respect to investigating the background of persons they contemplate employing. 20 *See* Rule 345.11 in the Supplementary Material. Rule 346 (Limitations—Employment and Association With Members and Member Organizations) Rule 346(b) Inclusion of Rule 407 Materials Related to “Private Securities Transactions” NYSE Rule 407 (Transactions—Employees of Members, Member Organizations and the Exchange) provides, in part, that no employee of a member organization shall establish or maintain a securities or commodities account or enter into a private securities transaction without the prior written consent of his or her member organization. The Exchange is proposing amendments to 346 to more logically reposition current Rule 407 requirements 21 with respect to “private securities transactions” ( *e.g.* , interests in oil or gas ventures, real estate syndications, tax shelters, etc.) and to harmonize the standards applicable to such transactions with those of NASD Rule 3040 (Private Securities Transaction of an Associated Person). 21 *See* Rule 407(b) and section .11 in the Supplementary Material. Specifically, the Exchange proposes repositioning requirements pertaining to “private securities transactions” from Rule 407 to Rule 346(b) since Rule 346 more directly addresses issues related to the outside activities of registered persons. Further, definitions of the terms “private securities transactions” and “selling compensation” are proposed that are substantially similar to the definitions found in corresponding NASD Rule 3040. 22 22 *See* Rule proposed Rule 346 Supplementary Material sections .10, .11 and .12, respectively. Proposed Deletion of Rule 346(c) The Exchange proposes deleting Rule 346(c) which currently requires that prompt written notice be given to the Exchange “whenever any member or member organization knows, or in the exercise of reasonable care should know, that any person, other than a member, allied member or employee, directly or indirectly, controls, is controlled by or is under common control with such member or member organization.” This provision is redundant in light of the FORM BD requirement, pursuant to its question number 10, that each broker dealer disclose such control relationships. The proposed amendment would be consistent with the NASD regulatory structure which has no corresponding requirement. Proposed Amendments to Rule 346(e), Rule 346(f) and 476A (Imposition of Fines for Minor Violation(s) of Rules) Rule 346(e) currently requires that persons who are assigned or delegated supervisory authority pursuant to Rule 342 must devote their entire time during business hours to their member organization, unless otherwise permitted by the Exchange. Over the past several years, the Exchange has had extensive experience reviewing and responding to approval requests pursuant to Rule 346(e) and has noted an increasing number of member organizations that have interrelated business arrangements with sister corporations active in various areas of the financial services industry. Also noted has been the corresponding increase in experience member organizations have gained in the allocation of supervisory responsibility when supervisory persons are assigned functions across corporate lines. Accordingly, the Exchange proposes amendments to Rule 346 that would eliminate the requirement of Exchange approval in order for supervisory persons to devote less than their entire time to the business of their member organization. In lieu thereof, the amended rule would require the prior written approval of the member organization, pursuant to the exercise of appropriate due diligence, for such arrangements. The amendments recognize that member organizations are best positioned to make such determinations. The proposed amendments 23 would require the identification of any entity for which the supervisory person will be performing services during business hours and a description of such services. The member organization's written approval would be required to set forth the approximate amount of time the supervisory person is expected to devote to each entity, with particular attention paid to the approximate time expected for the person, based upon qualifications and experience, to be able to effectively discharge his or her supervisory responsibilities on behalf of the member organization. In addition, the amendments would require documentation that the member organization has made a good faith determination that the arrangement will not compromise the protection of investors or the public interest, compromise the supervisor's duties at the member organization, or give rise to a material conflict of interest. These provisions have been repositioned from Rule 346(e) to Rule 346(c). 23 *See* proposed Rule 346(c). The nearest corresponding NASD requirement is found in NASD Rule 3030 (Outside Business Activities of an Associated Person) which generally states that no registered associated person of a member shall be employed by, or accept compensation from, any other person as a result of any other business activity without providing prompt written notice to the member. This standard is similar to that currently outlined in NYSE Rule 346(b) which applies only to non-supervisory member organization employees. While this standard continues to be appropriate for non-supervisory persons, the Exchange believes that, given the responsibilities attendant to persons who have been delegated supervisory duties, a heightened standard of control such as that prescribed by the proposed amendments remains advisable. It is proposed that the Interpretation of Rule 346(e) be deleted since its application is specific to the regulatory standard being deleted, and would thus be rendered irrelevant upon approval of the proposed amendments to the Rule. Further, Rule 476A, which lists violations of Exchange rules that are subject to a fine not to exceed $5,000, includes Rule 346(e) as a “failure to obtain Exchange approval” violation. Since the Exchange is proposing the elimination of the Exchange approval requirement under this provision (and since Rule 346, as amended, no longer contains a subsection (e), it is proposed that the reference to Rule 346(e) within Rule 476A be deleted as well. Proposed Amendments to Rule 346(f) Rule 346(f) currently requires that, except as otherwise permitted by the Exchange, “no member, allied member, approved person, employee or any person directly or indirectly controlling, controlled by or under common control with a member or member organization shall have associated with him or it any person who is known, or in the exercise of reasonable care should be known, to be subject to any ‘statutory disqualification.’” 24 As written, this provision is overly broad in that its prohibitive reach ostensibly extends to persons not subject to the jurisdiction of the Exchange. Thus, amendments are proposed to Rule 346(f) to reasonably clarify that its reach is limited to persons subject to the Exchange's jurisdiction. The amended language has also been repositioned as Rule 346(d). As violations of current Rule 346(f) are subject to Rule 476A, corresponding amendments to that rule that reflect this repositioning are proposed as well. 24 *See* Section 3(a)

(39)of the Act for the definition of statutory disqualification. Rules 351 (Reporting Requirements) and 401A (Customer Complaints) NYSE Rule 351(d) requires each member organization to report to the Exchange statistical information regarding customer complaints relating to such matters as may be specified by the Exchange. 25 Current Exchange policy requires that all complaints, including oral complaints, be reported pursuant to this provision. 26 25 *See* NYSE Information Memo Nos. 06-28 (May 4, 2006), 05-29 (April 22, 2005), 04-11 (March 9, 2004), 03-38 (September 19, 2003), 03-36 (August 25, 2003), and 98-16 (April 14, 1998). 26 *See* NYSE Information Memo No. 03-38 dated September 19, 2003. Amendments to Rule 351(d) are proposed that would limit reportable complaints to those that are “written,” consistent with NASD Rule 3070(c). Furthermore, proposed new NYSE Rule 351.15 limits the definition of the term “customer complaint” to written statements of a customer, or any person acting on behalf of a customer, other than a broker or dealer, alleging a grievance involving the activities of those persons under the control of a member organization. NYSE Rule 401A currently requires that member organizations acknowledge and respond to all complaints subject to the reporting requirements of Rule 351(d). As noted above, the Exchange is proposing to limit Rule 351(d) reportable complaints to those that are written. However, the Exchange believes that both written and oral complaints should be acknowledged and responded to pursuant to Rule 401A. Thus, it is proposed that the Rule 401A reference to Rule 351(d) be deleted to clarify that verbal complaints remain within the scope of Rule 401A. Note that Rule 401A requires member organizations to maintain written records of such acknowledgements, responses and other prescribed complaint-related follow-up activities, and further requires that such records be retained in accordance with NYSE Rule 440 (Books and Records). Rule 352 (Guarantees, Sharing in Accounts, and Loan Arrangements) Rule 352 restricts the extent to which member organization personnel may share in customer account profits or losses. Rule 352(b) generally prohibits member organizations, allied members and registered representatives from sharing profits or losses in any customer account. However, Rule 352(c) permits such sharing in proportion to financial contributions made to a joint account. Rule 352(c) The Exchange proposes to amend Rule 352(c) to exempt from the proportional contribution requirement joint accounts with immediate family members held by principal executives or registered representatives of a member organization. This amendment would avoid intrusive regulation into accounts that may naturally entail profit and loss participation on a disproportionate basis, as with joint accounts between husband and wife, while retaining coverage of the rule for other accounts. Similarly, NASD Rule 2330(f)(1)(A) generally permits an NASD member or a person associated with an NASD member to share in profits and losses with a customer, provided such sharing is proportionate to the financial contributions of each account holder while NASD Rule 2330(f)(1)(B) exempts from this proportionality requirement accounts shared between an associated person and a customer who is an immediate family member of such associated person. The amendments make clear that any sharing arrangement entered into pursuant to Rule 352(c) is subject to the Rule 352(a) provision that no member organization shall guarantee or in any way represent that it will guarantee any customer against loss in any account or on any transaction; and no employee of such member organization shall guarantee or in any way represent that either he or she, or his or her employer, will guarantee any customer against loss in any customer account or on any customer transaction. The amendments define the term “immediate family” in Rule 352(c) to include parents, mother-in-law or father-in-law, husband or wife, children or any relative to whose support the principal executive or registered representative contributes directly or indirectly. This definition harmonizes with the standard under NASD Rule 2330(f)(1)(B). The existing definition of “immediate family” in Rule 352(g) is retained for other provisions in the Rule, essentially allowing persons acting in the capacity of a registered representative or principal executives to lend to or borrow from a more extensive range of family members. Accordingly, it is proposed that Rule 352(g) be amended to confirm that its provisions are not applicable to Rule 352(c). The broader Rule 352(g) standard is also consistent with the corresponding NASD standard. 27 27 *See* subsection

(c)of NASD Rule 2370 (Borrowing From or Lending to Customers). Rule 352(d) The Exchange is also proposing non-substantive amendments to Rule 352(d) that streamline the reference to the exemption from the rule's general prohibition against sharing in profits. Specifically the revised provision would read that, notwithstanding the general prohibition against sharing in profits under paragraph (b), a person acting as an investment adviser (whether or not registered as such) may receive compensation based on a share of profits or gains in an account if all of the conditions in Rule 205-3 of the Investment Advisers act of 1940 (as may be amended from time to time) are satisfied. The provision retains its notice that all advisory compensation arrangements should be reviewed by member organizations and their counsel in light of applicable State and Federal law ( *e.g.* , ERISA). Rule 353 (Rebates and Compensation) First proposed in 1978 and adopted in 1979, 28 Rule 353(a) enacted into Exchange regulations anti-rebate provisions which had previously been contained in the Registered Representative Agreement. 29 In pertinent part, the Rule provides: 28 *See* Securities Exchange Act Release No. 15811 (May 11, 1979). 29 *See* NYSE Information Memo 79-42 (July 16, 1979). No member, allied member, registered representative or officer shall, directly or indirectly, rebate to any person, firm, or corporation, any part of the compensation he receives for the solicitation of orders for the purchase or sale of securities or other similar instruments for the accounts of customers of his member organization employer * * * The Rule has for some time been consistently interpreted by the Exchange to prohibit rebate arrangements directly between natural persons (without the knowledge or involvement of the broker dealers carrying such persons' registration) but not to prohibit arrangements when payments are made broker dealer to broker dealer and remitted to duly registered individuals. The Exchange has, upon request, provided “good business practice” safeguards regarding how to best structure such arrangements pursuant to Rule 353. Amendments to the Rule are proposed that would incorporate those safeguards and clarify relevant regulatory requirements applicable to these arrangements. The amendments would also re-title the rule from “Rebates and Compensation” to “Rebates and Commission Sharing Arrangements” to better reflect the focus of the amended text. NASD has no analogue to Rule 353. 30 30 NASD Rule 2420 (Dealing with Non-Members) states that no member may deal with a non-member unless at the same prices, for the same commissions or fees, and on the same terms and conditions as are by such member accorded to the general public. NASD IM-2420-2 (Continuing Commissions Policy) states that continuing commissions are permitted so long as the person receiving them is registered with the NASD. Proposed amendments to Rule 353(a) would reaffirm that the rule prohibits rebate arrangements “directly” to natural persons. Specifically, the revised text states that “[n]o employee of any member organization shall, directly remit to or receive from any person, firm, or corporation, any part of the compensation received for effecting transactions in securities or other similar instruments for a customer account, or directly pay or receive such compensation, or any part thereof, as a bonus, commission, fee or other consideration for business sought or procured for the employee or for any member organization of the Exchange.” Proposed Rule 353(b) would clarify that registered employees of member organizations may participate in the remittance or receipt of such compensation pursuant to an agreement which provides that:

(1)All remittances or payments to or from the registered employee are made pursuant an arrangement between the member organization and another registered broker-dealer;

(2)the terms of the payment arrangement are memorialized in a written agreement signed by authorized officers of both broker dealers;

(3)all such remittances or payments are duly recorded on the respective organizations' books and records; and

(4)affected customers receive prior, specific, plain language written disclosure of the payment arrangement. (Such disclosure must provide payment parameters and methods; mere “boiler plate” disclosure would not satisfy the provisions of this subsection). These provisions are intended to prevent improper payment arrangements between individuals that are under the broker dealers' “regulatory radar.” They are further meant to assure that sharing in commission-based income is limited to registered persons, as well as to assure the transparency of such arrangements not only to the broker dealers but also to affected customers. Proposed Rule 353.10 distinguishes other permissible arrangements that could be interpreted as types of commission sharing. Specifically noted are payments made pursuant to a carrying agreement under Rule 382, since such agreements: May involve netting of commissions by the carrying firm; are by definition limited to broker-dealers; are made under an arrangement disclosed to the customers; and are in writing. Also included is a reference to Section 28(e) of the Act which provides a safe harbor that protects money managers from liability for breach of fiduciary duty solely on the basis that they paid more than the lowest commission rate in order to receive brokerage and research services provided by a broker-dealer if a manager determines in good faith that the amount of commissions was reasonable in relation to the brokerage and research services received. Proposed Rule 353.10 also makes clear that any commission-sharing arrangements established pursuant to Rule 353 must comply with all other applicable SRO rules and federal regulations and may not otherwise compromise services to affected customers ( *e.g.* , with respect to “best execution” obligations). Rule 388 (Prohibition Against Fixed Rates of Commission) Rule 388 currently states that the Exchange does not require its members to charge fixed or minimum rates of commission, and provides that nothing in the Rules of the Exchange shall be construed as authorizing the charging of fixed rates. The Exchange adopted Rule 388 on April 3, 1975 in response to Rule 19b-3 31 of the Act and in conjunction with the Securities Acts Amendments of 1975, 32 which moved the securities industry toward fully negotiated commission rates. The Commission rescinded Rule 19b-3 in 1988 upon the enactment of Section 6(e)(1) 33 of the Act which specifically prohibited exchanges from imposing fixed rates of commissions. Since the purpose of Rule 388 has been achieved by Section 6(e)(1), it has been rendered redundant and serves no practical purpose. Accordingly, it is proposed that it be rescinded. The NASD has no comparable rule. 31 17 CFR 240.19b-3. 32 Elements of the SEC rule were enacted in amendments to the Act at Section 6(e)(1). 33 15 U.S.C. 78f(e)(1). Rule 401 (Business Conduct) 34 34 *See also* discussion under “Rule 342” above of the repositioning of Rule 401(b) text into Rule 342.23. Rule 401 states, in part, that each member organizations shall at all times adhere to the principles of good business practice in the conduct of its business affairs. The Exchange is proposing to add supplementary material to Rule 401 35 that would codify the understanding that principles of good business conduct extend to compliance with all regulatory provisions to which a member organization is subject (including applicable provisions of federal securities law, the rules and regulations of any SRO of which a member organization is a member, state securities law, ERISA, etc.). This would clarify that the principles of good business practice required by Rule 401 extend, for example, to the product-specific provisions of NASD Rule 2210 (Communications with the Public) and its interpretive material 36 which are not specifically addressed in corresponding NYSE Rule 472 (Communications with the Public) as well as to NASD Rule 2440 (Fair Prices and Commissions) and NASD IM-2440 (Mark-up Policy). 35 *See* proposed Rule 401.10. 36 For example, unlike NYSE Rule 472 and its interpretation, NASD IM-2210-2 addresses “communication with the public” issues specific to Variable Life Insurance and Variable Annuities. Likewise, NASD IM-2210-8 addresses communications issues specific to Collateralized Mortgage Obligations. Rule 407 (Transactions—Employees of Members, Member Organizations and the Exchange) The proposed amendments to Rule 407 are discussed above in the context of the “Rule 346” amendments. Rule 408 (Discretionary Power in Customers” Accounts) NYSE Rule 408 provides, in part, that no employee of a member organization shall exercise discretionary power in any customer's account or accept orders for an account other than the customer without first obtaining written authorization of the customer. The Exchange is proposing amendments to Rule 408(a) that would require member organizations to obtain the signature of any person or persons authorized to exercise discretion in such accounts, of any substitute so authorized, and the date such discretionary authority was granted. The proposed amendment would conform Rule 408(a) to corresponding requirements in NASD Rule 3110(c) and would promote better member organization controls to ensure that exercise of discretionary power over accounts is properly authorized. Rule 408(c) prohibits effecting purchases or sales which are excessive in size or frequency in view of the financial resources of such customer. It is proposed that Rule 408(c) be amended to harmonize it with NASD 2510(a) which prohibits transactions that are excessive in size or frequency in light of the “financial resources and character” of the account. Specifically, the Exchange proposes amending Rule 408(c) to take into consideration the “character” of an account by requiring consideration of the customer's “account history, investment objectives and age.” In addition, The Exchange proposes amendments to Rules 408(d) and 408.11 that would delete the term, “institutional account” and replace it with the term, “qualified investors” as the latter is a readily identifiable standard under the federal securities laws. Rules 409A (SIPC Disclosures) and 436 (Interest on Credit Balances) The Exchange is proposing the deletion of Rule 436 and its Interpretation and the repositioning of their substance into Rule 409A. The purpose is to both clarify the intent of Rule 436 and place the revised text in a more suitable context. Rule 409A currently provides, in part, that member organizations must advise each customer in writing, upon the opening of an account and at least annually thereafter, that they may obtain information about the Securities Investor Protection Corporation (SIPC), including the SIPC Brochure, by contacting SIPC, and shall provide the Web site address and telephone number of SIPC. The proposed amendments to Rule 409A would add that member organization account statements must contain a disclosure to the effect that free credit balances not maintained for purposes of reinvestment in securities will be ineligible for SIPC coverage. The purpose of consolidating Rule 436 and its Interpretation into Rule 409A is to position all of our provisions relating to SIPC and its consequences for customers in one rule for easier application and more logical placement. During the course of our rule review, we have attempted to align kindred and related rules into a more coherent structure. Rule 436, as it presently exists, was created to implement certain aspects of the Banking Act of 1933 (generally referred to as the Glass Stiegel Act). Specifically, Rule 436 and its Interpretation 436/01 provide that no member organization, unless subject to supervision by State banking authorities, shall pay interest on any credit balance created for the purpose of receiving interest thereon, however, interest may be paid on “free” credit balances left with a member organization for the purpose of reinvestment or temporarily being held awaiting investment. Accordingly, the Interpretation provides that member organizations should devise a method for determining whether the credit balance is left for investment or reinvestment purposes to ensure that such funds are fully protected by SIPC. Rule 436 has been interpreted to mean that free credit balances are to be used for reinvestment purposes, which falls fore square to the proposed change in Rule 409A(2) regarding SIPC not covering balances that are not being used for reinvestment purposes. Rule 412 (Customer Account Transfer Contracts) Background NYSE Rule 412 regulates the process by which member organizations transfer customer accounts through the Automated Customer Account Transfer Service (“ACATS”). 37 NYSE Rule 412 generally requires that, in order for a customer's account to be transferred to another firm through ACATS, the customer must formally initiate the transfer process by providing “authorized notice” to the receiving organization. In the context of Rule 412, authorized notice means the customer's signature on a transfer initiation form ( *i.e.* , a signed “TIF”). However, in certain circumstances (notably, bulk transfers) obtaining a signed TIF from each and every customer may not be practicable. Thus, Rule 412(f) permits member organizations to seek an exemption from the authorized notice requirement and to effect bulk transfers using “negative consent letter” notice to affected customers in lieu of individually executed TIFs. Currently, such exemptions are granted by the Exchange on a case-by-case basis. 37 ACATS is an automated system, administered by the National Securities Clearing Corporation (“NSCC”) that standardizes the transfer of customer accounts from one broker dealer to another. *See also* NYSE Information Memo No. 04-20 (April 8, 2004). Proposed Amendments Amendments to NYSE Rule 412(f) are proposed that would allow member organizations to effect a bulk transfer of customer accounts through the use of negative consent letters without first obtaining approval from the NYSE. The standards the Exchange proposes to codify and apply to this process are the same as those currently applied by the Exchange pursuant to its case-by-case review procedures and are essentially consistent with the NASD's regulatory guidance in this area. 38 The Exchange believes that codification of bulk transfer standards will better enable membership to standardize and coordinate their bulk transfer procedures. Exchange staff will, of course, remain available to provide interpretive guidance and practical advice when needed. 38 *See* NASD Notice to Members 02-57 (Bulk Transfer of Customer Accounts). In order for a member organization to qualify for the proposed “bulk transfer” exemption, two sets of standards must be met. First, the transfer in question must involve a large enough number of accounts such that it would be impracticable to obtain each customer's authorized notice as otherwise required by NYSE Rule 412(a). In addition, the circumstances necessitating the transfer must be an extraordinary, firm-driven corporate event outside the delivering 39 firm's ordinary course of business ( *e.g.* , a merger, the sale of a branch office or business division from one firm to another, an introducing firm moving their business to a new clearing firm, etc.). 39 In the context of Rule 412(f), the term “delivering firm” refers to the broker-dealer with which the customer has a direct business relationship ( *i.e.* , the “introducing” or “correspondent” firm if the delivering firm is not self-clearing.) Likewise, in the context of Rule 412(f), the term “receiving firm” refers to the “introducing” or “correspondent” firm (or self-clearing firm) on the receiving end of the transfer. Second, the delivering firm would be required to provide affected customers with notice regarding the prospective bulk transfer through the use of a negative consent letter. 40 The proposed amendments set forth the disclosure requirements to be contained in such letters. Specifically, an acceptable negative consent letter would be required to include: A synopsis of the circumstances necessitating the transfer (a merger, the sale of a branch office from one firm to another, an introducing firm moving their business to a new clearing firm, etc.); notification of the customer's right to opt out of the transfer; sufficient notice (generally, a minimum of 30 calendar days) for customers to opt out of the transfer; disclosure of any previously established fees associated with the transfer; information explaining the manner in which the customer can effect a transfer to another broker-dealer, if the customer so chooses; and a statement regarding the compliance of both the delivering and receiving firm with SEC Regulation S-P. 41 40 The rationale behind requiring that the negative consent letter be sent by the delivering firm is that it is the organization that the customers “know” ( *i.e.* , the firm most prominently featured on the customers” statements and with whose personnel ( *e.g.* , their registered representative) they generally interact. The presumption is that customers are more likely to open mail from a firm they know rather than from a firm with which the customer has no business relationship (the “receiving firm”), in which case the mail might be disregarded as an advertisement or solicitation. 41 *See* Securities Exchange Act Release No. 42974 (June 22, 2000), 65 FR 40334 (June 29, 2000) (“Privacy of Consumer Financial Information”). The proposed amendments would also require that both the delivering and the receiving firms agree in writing to any bulk transfer pursuant to Rule 412(f). This is to ensure that the proposed provisions are not used, for example, by a registered representative who is moving to another firm to take his customers with him via bulk transfer without the knowledge or consent of the delivering firm. Absent the explicit approval of both firms, any transfer of customer accounts under such circumstances must be effected pursuant to each customer's authorized notice and would be fully subject to the provisions of Rule 412. As noted above, only extraordinary, firm-driven corporate events outside the delivering firm's ordinary course of business can serve as the basis for a Rule 412(f) exemption. The proposed amendments would preclude member organizations from transferring customer accounts pursuant to Rule 412(f) at the behest of individual brokers who have been terminated or who have resigned from the firm. Any such customer account transfer would require the affirmative consent of each customer pursuant to a duly executed TIF and would be fully subject to Rule 412 and its Interpretation. 42 42 *See* proposed Rule 412.40. Rule 416A (Member and Member Organization Profile Information Updates and Quarterly Certifications Via the Electronic Filing Platform Rule 416A requires member organizations to establish and regularly maintain firm profile information via the Exchange's Electronic Filing Platform (“EFP”). It further requires member organizations to comply with any Exchange request for such information. Information is recorded on an EFP template. In light of the proposed elimination of the “allied member” designation, the Exchange proposes amending Rule 416A to create a new reporting designation to be known as “principal executives” which would capture each member organization's control persons. The proposed 43 designation would be defined to include persons designated by a member organization as a “principal executive officer,” as such terms is defined in subsection (b)(5) of NYSE Rule 311 (Formation and Approval of Member Organizations), or their functional equivalents. Thus, the “principal executives” designation would encompass each Chief Executive Officer, Chief Financial Officer, Chief Operations Officer, Chief Compliance Officer, Chief Legal Officer, or any person assigned comparable functions or responsibilities ( *e.g.* , a person in a Limited Liability Company with principal executive responsibilities but with other than a principal executive title). 43 *See* proposed .10 of the rule's “Supplementary Material.” The proposed amendments would essentially codify existing Exchange EFP reporting requirements 44 with respect to these key personnel contacts, which are also required to be reported via FORM BD. 45 A key benefit of reporting these key contact persons to the Exchange as well as on FORM BD is that the EFP system has interactive functionalities that allow the Exchange to specifically target one or more contact persons to receive “e-mail blasts” with time-sensitive instructions or regulatory information. The proposed rule would also allow for requiring the designation of other categories of persons as otherwise directed by the Exchange. 44 *See* NYSE Information Memo No. 01-11, dated June 19, 2001. 45 *See* item 2(a) in Schedule A of FORM BD (Direct Owners and Executive Officers). Unlike the “allied member” designation, there would be no exam qualification requirement particular to the “principal executive” designation per se ( *see also* the deletion of “allied member” examination requirement from Rule 304A) though, of course, each principal executive would be required to take and pass any qualification examinations necessary to perform their assigned functions. Rule 445 (Anti-Money Laundering Compliance Program) Background NYSE Rule 445 requires each member organization to develop and implement an anti-money laundering (“AML”) program consistent with ongoing obligations under the Bank Secrecy Act. 46 The prescribed AML program obligations include the development of internal policies, procedures and controls; the designation of a person or persons to implement and monitor the day-to-day operations and internal controls of the program (commonly referred to as the “AML Officer”); ongoing training for appropriate persons; and an independent testing function for overall compliance. 46 31 U.S.C. 5311 *et seq.* The Exchange is proposing amendments to NYSE Rule 445 to clarify the term “prompt notice” and to harmonize other aspects of its AML program requirements with those prescribed by NASD. 47 47 *See* NASD Rules 3011, IM-3011-2 and IM-3011-2. Proposed Amendments Prompt Notice In addition to requiring that each member organization designate a person or persons to implement and monitor the day-to-day operations and internal controls of its AML compliance program, NYSE Rule 445(4) further requires that “prompt notice” be given to the Exchange regarding any change in such designation. The Exchange proposes amending NYSE Rule 445(4) to clarify that the term “prompt notice” means not later than 30 days following any change in such information, consistent with the requirements prescribed under NYSE Rule 416A(b). 48 NASD IM-3011-2 (“Review of Anti-Money Laundering Compliance Person Information”) requires that the updating of such designation be within “17 business days after the end of each calendar quarter. * * *” The Exchange believes that the more stringent requirement herein proposed is reasonable and will provide more current information regarding AML contact persons. 48 *See* section

(b)of NYSE Rule 416A (“Member and Member Organization Profile Information Updates and Quarterly Certifications Via the Electronic Filing Platform”), which requires member organizations to update their required membership profile information promptly, but in any event not later than thirty days following any change in such information. Prior Written Approval The Exchange proposes deleting the first sentence of NYSE Rule 445(4)(C), which sets forth a “prior written approval requirement” for member organizations in instances where the designated person under Rule 445(4) is employed not by the member organization, but by an affiliate of the member organization. 49 NASD Rules do not have a comparable approval requirement. 50 Similarly, the Exchange proposes deletion of Rule 445.30, as this section, which provides an exemption to the approval requirement, would be rendered irrelevant. 49 *See* NYSE Rule 445(4) (B), which provides that a person may be designated under 445(4) when the person is employed by an entity that directly or indirectly controls, or is controlled by, or is under common control with the member organization. 50 *See* also NASD IM-3011-2. *See* also NASD Notice to Members 06-07. Independent Testing NYSE Rule 445.20 sets forth three categories of persons who are currently deemed insufficiently independent to conduct the required testing requirement pursuant to NYSE Rule 445(3). Specifically, the Rule prohibits such testing from being conducted by

(1)A person who performs the functions being tested, or

(2)the designated AML compliance officer, or

(3)a person who reports to either the person performing the functions being tested or the AML compliance officer. The Exchange proposes to amend NYSE Rule 445.20 to harmonize it with corresponding NASD IM 3011-1 51 by adding an exception which would allow a person categorized in subsections

(1)or

(2)to conduct the testing when four conditions are satisfied. First, the member organization must have no other qualified internal personnel to conduct the testing. Second, the member organization must establish written policies and procedures to address conflicts that may arise from allowing the testing to be conducted by a person who reports to the person(s) whose activities are the subject of the testing. Third, the person who conducts the testing must, to the extent possible, report the test results to a person at the member organization who is senior to the person described in Rule subsections

(1)and (2). If the person does not report the results consistent with this provision, the member organization must document a reasonable explanation for not doing so. Fourth, the member organization must document its rationale, which is required to be reasonable, for determining that it has no alternative than reliance on these conditions to comply with the testing requirement. 51 *See* also NASD Notice to Members 06-07. This exception to the general “independent testing” standard is proposed to allow small firms the flexibility to use appropriate internal personnel to conduct the testing required by Rule 445, while requiring that controls be in place to retain the effectiveness of the testing process. Category 2 (“Financial/Operational Rules”) Background In order to address certain Financial/Operational Rules not encompassed by the CAG subcommittee review process, the Exchange organized an in-house Financial/Operations Rule Committee and enlisted the participation of volunteers from SIFMA's Capital, Operations and Clearing Firms Committees and the NASD. Proposed Amendments Rule 325 (Capital Requirements for Member Organizations) Restructuring of the Rule NYSE Rule 325 requires member organizations subject to Rule 15c3-1 52 under the Act to comply with the capital requirements prescribed therein and with the additional net capital requirements established by the NYSE. The Exchange is proposing to restructure the text of Rule 325 into two separate sections: General Provisions 53 and Notification Provisions. 54 This non-substantive change will separate the net capital notification requirements contained in current Rule 325(b)(1) and (b)(2) from the other provisions of Rule 325. 52 17 CFR 240.15c3-1. 53 *See* proposed Rule 325(a),

(b)and (c). 54 *See* proposed Rule 325(e). Rule 325(c) NYSE Rule 325(c)(1) currently provides that a long put option or a long call option, which is not an obligation of a clearing agency or has not been endorsed or guaranteed by a member organization, has no net capital value under any provision of Rule 325. The Exchange is proposing to rescind this provision because the substance of this requirement is covered in Rule 15c3-1 under the Act. Subsection (c)(2) of current Rule 325 provides for net capital requirements on certain proprietary day trading positions subject to a special margin requirement. The Exchange is proposing to rescind Rule 325(c)(2). This provision is no longer necessary because the SEC's capital rule requires firms to be in compliance on a moment to moment basis. Additionally, the Exchange is proposing to adopt, as new Rule 325(c), a provision from NASD Rule 3130(e) which will require a member organization to suspend all business operations during any period of time during which the member organization is not in compliance with applicable net capital requirements as set forth in Rule 15c3-1 under the Act. Rule 326 (Growth Capital Requirement, Business Reduction Capital Requirement, Unsecured Loans and Advances) NYSE Rule 326(a) currently sets forth the conditions that trigger restrictions on business growth for member organizations. NYSE Rule 326(b) requires reduction of business by member organizations if certain conditions exist, as prescribed by the rule. The Exchange is proposing to expand the application of Rule 326(a) and

(b)to apply to all broker-dealers, not just those which carry customer accounts. However, the proposed amendments clarify that non-carrying firms will not be subject to the automatic and self operative Rule 326(a) and (b), unless specifically directed by the Exchange. The Exchange is also proposing to amend Rule 326(a)(1) and (b)(1). The current provisions require a condition triggering a growth restriction or business reduction to be known to the Exchange for five consecutive business days. The five day period is intended to provide breathing room so that these conditions can be corrected. The proposed amendments to Rule 326(a)(1) and (b)(1) provide that the condition must be known to either the member organization or the Exchange for five consecutive business days. The Exchange is proposing this change so that there is no benefit in not advising the Exchange about these conditions. NYSE Rule 326(a)(2) provides for restrictions on the growth of a member organization's business at the discretion of the Exchange, much as subsection (b)(2) of Rule 326 allows for the mandated reduction in business at the discretion of the Exchange. Amendments to these provisions are proposed to clarify that the Exchange may exercise its discretion with respect to financial or operational conditions relating to a member organization's business. Further, the proposed new Rule 326(a)(3) clarifies that “expansion of business” may include: Net increase in the number of registered representatives or other producing personnel; exceeding average commitments over the previous three months for market making or block positioning; initiation of market making in new securities or any new firm trading or other commitment in securities or commodities in which a market is not made (other than riskless trades associated with customer orders); exceeding average commitments over the previous three months for underwritings; opening of new branch offices; entering into any new line of business or deliberately promoting or expanding any present lines of business; making unsecured or partially secured loans, advances, drawings, guarantees or other similar receivables; and such other measures as the Exchange deems appropriate under the circumstances in the public interest or for the protection of investors and member organizations. The Exchange proposes to reposition the provisions in current Rule 326.10 which define “expansion of business” into subsection (a)(3) of Rule 326. In addition, the Exchange is proposing to reposition the provisions of current Rule 326.11, which define “Business Reduction,” into subsection (b)(3) of the rule. The Exchange is also proposing to add certain conditions contained in NASD IM-3130(e) into new subsection (b)(3) to harmonize the SROs' examples of business reductions by member organizations. The additions include: Promptly paying all free credit balances to customers; promptly effecting delivery to customers of all fully-paid securities in the member's possession or control; accepting no new customer accounts; restricting the payment of salaries or other sums to partners, officers, directors, shareholders, or associated persons of the member; and accepting unsolicited customer orders only. Current NYSE Rule 326(c) restricts all member organizations from making unsecured loans or advances to certain individuals or entities associated with the member organization when certain conditions are met. Current Rule 326(d) requires all member organizations to recall unsecured loans or advances when certain business reduction criteria are met. The Exchange is proposing to reposition the requirements in current Rule 326(c) and

(d)regarding unsecured loans and advances in subsections (a)(3) and (b)(3), as part of the enumeration of examples of “expansion of business” and “business reduction,” and to afford their application to all such loans regardless of counterparties. Current NYSE Rule 326.12 imposes an automatic restriction on member organizations that introduce accounts on a fully disclosed basis to, or clear on an omnibus basis through, a restricted member organization. The Exchange is proposing to reposition Rule 326.12 into 326.10 in light of other proposed amendments to the rule and to amend this provision so that the restrictions will not flow automatically to the introducing firm when its clearing firm is restricted. The proposed rule provides that the Exchange may apply this requirement at its discretion. NYSE Rule 326.13 currently allows member organizations to enter into subordination agreements, which are not allowable as good capital under NYSE Rule 325, to increase the member organization's total subordinated liabilities and capital available, and for the protection of customers. The Exchange is proposing to rescind .13 inasmuch as recourse to non-allowable capital has not been utilized. The Exchange is proposing to add new Rule 326.11 that illustrates conditions under which the Exchange may exercise its discretion to reduce or limit a member organization's business. These conditions are contained in NASD IM-3130(e) and include situations such as non-current and/or inaccurate books and records, lack of full compliance with Rule 15c3-3 55 under the Act and the inability to promptly clear and settle transactions. 55 17 CFR 240.15c3-3. Lastly, the Exchange is proposing to change the title of Rule 326 to “Business Growth Restrictions and Business Reduction Requirements” and to make certain changes to the subheadings within the Rule. Rule 382 (Carrying Agreements) NYSE Rule 382 governs Exchange requirements for carrying agreements and provides for the contractual allocation of key functions involved in the opening and operation of customer accounts and the settlement and clearance of transactions in such accounts. The Exchange is proposing to amend subsection

(a)to provide that standardized forms of agreements between member organizations and introducing firms that are registered broker-dealers, which have been previously approved by the Exchange, need not be submitted to the Exchange for approval. Additionally, the Exchange is proposing to amend Rule 382(a) to provide that carrying arrangements previously approved by another SRO with a comparable rule to NYSE Rule 382, *e.g.* , NASD Rule 3230, will not require submission to and approval by the Exchange. The Exchange is proposing amendments to Rule 382(b) to address third party piggy-back arrangements by requiring that carrying agreements for accounts held on a fully disclosed basis specifically identify and allocate respective functions and responsibilities of each introducing and carrying organization that is directly or indirectly a party to such agreements. Amendments to Rule 382(b) are proposed that will clearly delineate which functions and responsibilities must be allocated to the carrying organization and will require that the carrying agreements so state. Amendments to Rule 382(b) are also proposed to state that the carrying agreement may provide that the opening and approval of accounts in a manner consistent with NYSE Rule 405, the maintenance of books and records in a manner consistent with Rules 17a-3 and 17a-4 under the Act and the transmission of orders to the carrying organization for execution may be allocated to an introducing organization, which is other than a registered broker or dealer. Such amendments would, in recognition of present industry practice, permit entities which are other than registered brokers or dealers, as the introducing party which directly interfaces with the customer, to undertake the mechanical aspects of order transmission and the ministerial aspects of bookkeeping and of opening and approving accounts. The term “opening and approving” is intended to limit the scope of the amended rule to the acceptance of new accounts, but only in circumstances where it has gathered sufficient information to satisfy the Exchange's Rule 405 precept as the standard for recording investment objectives and other basic documentation. By establishing Rule 405 as the norm to follow (even by a person not formally subject to its fiat) and by asserting it as a prerequisite to an acceptable Rule 382 agreement, it is believed that investor protection is reasonably served. Under the proposed amendments, more continuous and stringent regulatory requirements such as “monitoring of accounts” would not be permitted to be allocated to an entity which is not a registered broker or dealer. The Exchange is proposing to add to current Rule 382(c), which requires written notification to customers whose accounts are held on a fully disclosed basis, that upon the opening of such account, the customer shall be notified in writing by the party designated by the agreement to make such notification of the responsibilities allocated to each respective party, and of any subsequent material change to such allocation or to the relationship of the parties, if any, promptly upon the occurrence of any such change. The proposed amendments to the Rule reposition this provision into new subsection (b)(4). The Exchange is proposing to add Rule 382(e)(2) which provides that carrying agreements may provide for the receipt of customer funds or securities by the introducing organization and delivery thereof to the carrying organization in a manner consistent with Rules 15c3-1 and 15c3-3 under the Act, provided that the introducing organization maintains appropriate procedures and systems for the receipt and delivery of such funds or securities to ensure compliance with all relevant rules under the Act. Additionally, amendments are proposed to codify current Exchange practice by adding a new subsection

(f)to Rule 382 to require that each carrying organization provide the Exchange with written notice 10 business days prior to its commencement of the carrying the accounts of any new correspondents, identifying such new correspondents and furnishing such additional information as may be requested by the Exchange. Moreover, each such carrying organization must, contemporaneously, represent to the Exchange that it has the financial and operational resources and support staff to take on such additional correspondent activity. The proposed amendments also codify the principle that, to the extent that a particular function is allocated to one of the parties, the other parties to the agreement shall supply to the responsible organization all data in its possession pertinent to the proper performance and supervision of that function. The agreement shall include an acknowledgement by each relevant party of this obligation. Rule 416 (Questionnaires and Reports) NYSE Rule 416(b) requires that, unless a specific temporary extension of time has been granted, a fee of $500 shall be imposed for each day that such report is not filed in the prescribed time. Requests for such extensions of time must be submitted to the Exchange at least three business days prior to the due date. The Exchange is proposing to amend subsection

(b)to clarify that each “day” means each “business day” for purposes of determining whether a report is filed in the prescribed time. The proposed amendments also provide that the fee imposed by the Exchange when reports are not filed on time may be waived by the Exchange, in whole or in part. The Exchange is proposing to add a new subsection .25 to the Supplementary Material of Rule 416 which will consist of language moved from current NYSE Rule 418.25. 56 This provision requires member organizations, approved to use an alternative method of computing net capital under Appendix E of Rule 15c3-1 under the Act, to file supplemental and alternative reports, as may be prescribed by the Exchange. The NASD does not currently have such a provision but stated that it may propose to adopt a similar requirement. 56 *See* Securities Exchange Act Release No. 52269 (August 16, 2005) 70 FR 49349 (August 23, 2005) (SR-NYSE-2005-19). *See also* NYSE Information Memo 05-62. Rule 418 (Audit) Under current NYSE Rule 418, the Exchange may require member organizations, at any time, to conduct an audit of its financial statements in accordance with Exchange Rules and Rule 17a-5 under the Act. 57 The Exchange is proposing to amend this provision by removing the reference to Exchange Rules and replacing it with language that allows the Exchange to require an audit or other similar procedure as the Exchange may deem necessary for the protection of investors or in the public interest. The Exchange is also proposing to rescind subsection .10 of Rule 418, which requires member organizations that are subject to this rule to file with the Exchange an agreement covering its annual audit during the following year because the substance of this provision is covered by Rule 17a-5 under the Act. 57 17 CFR 240.17a-5. NYSE Rule 418.12 requires member organizations that fail to file an audited financial and operational report in the time period prescribed by the Exchange to pay a $200 penalty for each day of delayed filing. The Exchange is proposing to amend this provision to clarify that each “day” means each “business day.” In light of proposed amendments to the NYSE Rules to remove the terms “allied member” and “member” (where appropriate) from the rulebook, the Exchange is proposing to amend Rule 418.15 to require that the financial statements be signed by two principal executives of the member organization and that such financial statements be made available to all principal executives of the member organization. NASD has expressed that it may propose to adopt a similar provision to NYSE Rule 418.15. The Exchange is proposing to rescind Rule 418.20 which requires, in part, that all pertinent audit working papers and underlying documentation be retained for at least three years and that it be available for review by a representative of the Exchange at the office of the respondent or at the office of the independent public accountant. This provision is not required under Act rules and the NASD does not have a similar provision in their rules. Further, this provision has not been exercised during the time that this rule has been in effect. As noted above, Rule 418.25 has been repositioned into .25 of Rule 416. Rule 420 (Reports on Borrowing and Subordinated Loans for Capital Purposes) Currently, the NYSE and the NASD use subordinated loan forms which reflect the requirements of Appendix D to Rule 15c3-1 under the Act but differ in minor provisions and in certain procedural ways. The Exchange is proposing to unify the procedures of NYSE and NASD in this area. Specifically, the Exchange is proposing to consolidate paragraphs

(a)and

(b)of Rule 420 to combine the subordination agreement requirements for the lending of both cash and notes collateralized by securities. The proposed amendments also add that loans of cash or collateralized notes made to a member organization are subject to the requirements of Rule 420(a). In addition, Rule 420(a)(2), which calls for an opinion of counsel as required by NYSE Rule 313(d), will be modified to provide that an opinion will no longer be required when the loan is made by a holding company or principal executive of a member organization or by a bank, as defined in Section (3)(a)(6) 58 of the Act, unless so directed by the Exchange. 58 15 U.S.C. 78c(3)(a)(6). NYSE Rule 420(c) requires a general partner of a member organization to promptly report to the NYSE any borrowings of cash or securities, the proceeds of which will be contributed to the net capital of the member organization. The rule further imposes certain standards for the documents evidencing such borrowings as the Exchange deems appropriate and requires that such documents be submitted to and approved by the Exchange before the cash or securities involved may qualify as net capital. The Exchange is proposing to codify current Exchange practice by amending this provision to apply to borrowings of participants in LLC's. The NASD does not have a similar rule to NYSE Rule 420 but has indicated it may propose to adopt similar requirements for carrying firms only. Rule 422 (Loans of and to Directors, etc.) NYSE Rule 422 prohibits unsecured loans between members of the Board or of employees of the NYSE and member organizations, absent the prior consent of the NYSE board of directors. This provision was amended post-merger to include subsidiaries of NYSE Group. The Exchange is proposing to rescind Rule 422 in its entirety because the substance of this provision is contained in the supplementary guidelines to NYSE's internal ethics code. Rule 431 (Margin Requirements) Staff is proposing to amend Rule 431(e)(8)(C)(ii) to clarify that, for purposes of this subsection, amounts agreed to be extended by a member organization shall be deducted in determining capital under Rule 326 if the loan commitment is irrevocable; amounts agreed to be extended shall be presumed irrevocable commitments, unless a broker-dealer can evidence otherwise. Rule 440 (Books and Records) NYSE Rule 440 requires member organizations to make and preserve books and records as the Exchange may prescribe, and as prescribed by Rule 17a-3 59 under the Act. The recordkeeping format, medium and retention period is to comply with Rule 17a-4 under the Act. 60 The Exchange is proposing to rescind Rule 440.10(2), which requires member organizations, at a minimum of once per month, to account for all U.S. government bearer instruments by physical examination and comparison with its books and records. This provision is outdated, as there are few, if any, U.S. government instruments in bearer form and the requirement to account for any physical instruments is included in Rule 17a-13 61 under the Act and is generally referenced in subsection .10 of the rule. 59 17 CFR 240.17a-3. 60 17 CFR 240.17a-4. 61 17 CFR 240.17a-13. Category 3 (“Buy-In Rules”) Background In order to address the operational “Buy-In Rules” not encompassed by the CAG subcommittee review process, the Exchange organized an in-house committee and enlisted the participation of the NASD and the Ad Hoc Buy-in Subcommittee of the SIFMA Securities Operations Division. The SIFMA subcommittee, which predates the SRO Rule Harmonization Initiative, was established to identify and standardize various Buy-in rules and procedures in conjunction with Street Side contracts including Stock Loans. 62 The proposed amendments discussed below result from the combined recommendations of these participants. 62 The Exchange previously worked with this committee to amend and harmonize its rules with those of other SROs. *See* Securities Exchange Release No. 52842 (November 28, 2005), 70 FR 72321 (December 2, 2005) (SR-NYSE-2005-50). *See also* NYSE Information Memo 05-100. The NYSE Buy-In Rules apply to transactions in Exchange-listed securities that are not subject to the rules of a Qualified Clearing Agency such as the Depository Trust Clearing Corporation (“DTCC”) 63 or the National Securities Clearing Corporation (“NSCC”), 64 including the Continuous Net Settlement (“CNS”) 65 transactions that settle through them. 63 The Depository Trust Clearing Corporation is a member of the U.S. Federal Reserve System, a limited-purpose trust company under New York State banking law and a registered clearing agency with the SEC. 64 NSCC, is a central counterparty that provides centralized clearance, settlement and information services for broker-to-broker equity, corporate bond and municipal bond, exchange-traded funds and unit investment trust trades in the United States. NSCC provides clearing and settlement, risk management, central counterparty services and a guarantee of completion for trades. NSCC also nets trades and payments among its participants, reducing the volume of securities and payments that need to be exchanged each day. 65 CNS is an automated accounting system that centralizes the settlement of compared security transactions and maintains an orderly flow of security and money balances. CNS nets daily transactions, including open positions to create a single long or short position for each participant, minimizing security movements and associated costs. In an effort to promote harmonization of the SRO Operational, Clearing and Settlement Rules (collectively referred to as the “Buy-In Rules) the Exchange is proposing amendments to NYSE Rules 140 (Members Closing Contracts—Conditions), 282 (Buy-in Procedures); 283 (Members Closing Contracts—Procedure); 285 (Notice of Intention to Successive Parties); 286 (Closing Portion of Contract); 287 (Liability of Succeeding Parties); 288 (Notice of Closing to Successive Parties); 289 (Must Receive Delivery); and 290 (Defaulting Party May Deliver After ‘Buy-in' Notice). Proposed Amendments The Exchange proposes to reposition Rules 140, 283, 285, 286, 287, 288, 289, and 290 into Rule 282 so that Rule 282 will serve as a complete repository for all requirements and procedures related to buy-ins. 66 The substance of the repositioned rules is not being altered. In addition to making these requirements more readily accessible, the amendments will bring the rule closer to the format of its NASD Rule 11810 (Buying-In) and IM-11810 (Sample Buy-In Forms). 66 *See* proposed Rules 282.25, .30, .35, .40, .45, .50, and .55. In addition to this consolidation, the following amendments to Rule 282 are proposed in order to clarify certain technical requirements with respect to buy-in processes: Rule 282(1)(b) requires that the defaulting member organization receiving a buy-in notice must send a signed, written response to the initiating organization stating its position with respect to the resolution of the item no later than 5 p.m. ET on the date of issuance of the buy-in notice. The Exchange proposes the addition of Supplementary Material section .15 that would clarify that “[f]or purposes of Rule 282(b), e-mail and electronic systems shall be acceptable as the functional equivalent of a writing, in lieu of paper form, provided that it is retainable and susceptible of acknowledgement to the same degree and extent as the written response.” 67 67 *See* Rules 17a-3 and 17a-4 under the Act and NYSE Rules 440 (Books and Records). NYSE Rule 282(c) states that if the “buy-in” notice has not been returned by 5 p.m. ET on the “buy-in” notice date, or the “buy-in” notice is returned as “DK'd,” or the “buy-in” notice is returned with the indication that the contract is known but that delivery cannot be made, a “buy-in” shall be executed on the “effective date” by the initiating member organization by purchasing all or part of the securities necessary to satisfy the amount requested in the “buy-in” notice. Proposed amendments to Rule 282(c) would clarify that if a notice of buy-in is not acknowledged by the failing party by 5 p.m. ET on the day of issuance, the notice will be deemed accepted. However, prior to the proposed execution date, the seller has a right to request proof of fail obligation in order to prove otherwise. This conforms with the NASD's current requirement. Rule 282(1)(h) requires that the initiating member organization executing the buy-in shall immediately upon execution, but no later than 5 p.m. ET, notify the defaulting member organization as to the quantity purchased and the price paid. The Exchange is proposing to amend Rule 282(1)(h) to clarify that if there is a system outage at the Clearing Firm or the Depository, then notification by the initiating member organization executing a buy-in must take place prior to the opening on the next business day. The Exchange proposes the addition of provision Rule 282(2) to clarify that fails that are subject to the rules of a Qualified Clearing Agency must comply with the procedures or requirements of the Qualified Clearing Agency.” It is also proposed that Rule 282 be amended to adopt certain provisions of NASD IM 11810 (Sample Buy-In Forms) because these provisions are applicable to both NYSE and NASD membership. Specifically, the Exchange proposes adding section

(f)(Securities in Transit) as new Rule 282.60; section

(h)(`Close-Out' Under Committee or Exchange Rulings) as new Rule 282.65; section

(i)(Failure to Deliver and Liability Notice Procedures) as new Rule 282.70; section

(j)(Contracts Made for Cash) as new Rule 282.75; section

(l)(Buy-In' Desk Required) as new Rule 282.80; and section

(m)(Buy-In of Accrued Securities) as new Rule 282.85. Background/Reference Rule Synopses Rule 140 (“Members Closing Contracts—Conditions”) Rule 140 states that a member organization may close a contract as provided in Rule 283 in the event that the other party to the contract does not recognize the contract or the other party to the contract neglects or refuses to exchange written contracts pursuant to Rule 137. Rule 283 (“Members Closing Contracts—Procedure”) Rule 283 refers to the procedure for closing contracts. According to Rule 283, oral or written notice must be provided to the other party at least thirty minutes prior to closing. Rule 285 (“Notice of Intention to Successive Parties”) According to Rule 285, a member organization that receives notice that a contract is to be closed for its account for non-delivery shall immediately re-transmit notice to any other member organization from whom the securities involved are due. Rule 286 (“Closing Portion of Contract”) According to Rule 286, when notice of intention to close a contract, or re-transmitted notice thereof, is given for less than the full amount due, it shall be for not less than one trading unit. Rule 287 (“Liability of Succeeding Parties”) According to Rule 287, the closing of a contract must be for the account and liability of each succeeding party in interest, and, if notice of such contract being closed is transmitted, then such closing shall automatically close all contracts with respect to which such re-transmitted notice shall have been delivered prior to the closing. Rule 288 (“Notice of Closing to Successive Parties”) Under Rule 288, if a contract, other than a contract the close-out of which is governed by the rules of a Qualified Clearing Agency, has been closed, the member organization who closed, or gave order to close, the contract shall notify the member organization for whose account the contract was closed. In addition, the rule requires the member organization receiving such a notification, or receiving such notice that a contract has been closed pursuant to the rules of a Qualified Clearing Agency, shall immediately notify each succeeding party in interest and other member organizations to which re-transmitted notice pursuant to Rule 285 has been sent. The rule also requires any statements of resulting money differences to be rendered immediately. Rules 289 (“Must Receive Delivery”) and 290 (“Defaulting Party May Deliver After ‘Buy-in’ Notice”) Rules 289 and 290 clarify the requirements and timeframes upon which a defaulting member organization may deliver against a “buy-in” notice. Rule 289 requires an initiating member organization to accept physical delivery of some or all of the securities that are the subject of a buy-in, thereby halting the buy-in execution for those securities if those securities are tendered prior to the buy-in. Rule 290 permits a defaulting member organization to deliver securities subject to a notice of buy-in until 3 p.m. Eastern Time on the day of the execution of the buy-in. Rule 282 (“Buy-in Procedures”) Rule 282 describes procedures to be followed when a securities contract, except a contract where its close-out is governed by the rules of a Qualified Clearing Agency (such as DTC and NSCC), which has not been completed by the seller in accordance with its terms, may be closed-out by the buyer ( *i.e.* , the initiating member organization). According to the Rule, the close-out may not be sooner than three business days after the due date for delivery. Rule 282 allows the member organization failing to receive the securities to execute the buy-in. The Supplementary Material of Rule 282 is intended to ensure that member organizations comply with the closeout requirements of Regulation SHO. 68 Specifically, member organizations are obligated to comply with the marking, locate, and delivery requirements of Regulation SHO for sales of equity securities under the Act. Member organizations are required to have policies and procedures in place to comply with these rules, including closeout procedures. 69 68 17 CFR 242.200 through 242.203. 68 At the same time the changes noted above were being developed, the SEC implemented Regulation SHO—Regulation of Short Sales, which shares a similar purpose with the buy-in rules—the reduction of fails to deliver. Rule 203 to Regulation SHO imposes locate and borrowing/delivery requirements on broker-dealers that sell equity securities, including closeout requirements on certain open fail to deliver positions. Rule 430 (Partial Delivery of Securities to Customers on C.O.D Purchases) Rule 430 prescribes that no member organization “may accept for a customer a purchase order for any security, other than obligations of the United States Government, unless it has first ascertained that the customer placing the order or its agent will receive against payment securities in an amount equal to any execution confirmed to the customer, even though such an execution may represent the purchase of only a part of a larger order.” The Exchange proposes deleting Rule 430 in its entirety as the substance of the rule is incorporated in NYSE Rule 387(a)(4). Rule 387(a)(4) prohibits a member organization from accepting an order from a customer pursuant to an arrangement whereby payment for securities purchased or delivery of securities sold is to be made to or by an agent of the customer unless the member organization “has obtained an agreement from the customer that the customer will furnish his agent instructions with respect to the receipt or delivery of the securities involved in the transaction promptly upon receipt by the customer of each confirmation, or the relevant data as to each execution, relating to such order (even though such execution represents the purchase or sale of only a part of the order)” and that in any event the customer will assure that such instructions are delivered to his agent no later than as prescribed by Rule 387(a)(4). Category 4 (“Member” and “Allied Member” Rules) As noted above, amendments are proposed throughout this filing that update terminology in light of the Exchange's current organizational structure. Of particular significance is the proposed deletion, where appropriate, of the term “member” and the elimination of the term “allied member” as a regulatory category. 70 The selective deletion of the term “member” reflects the fact that it has been redefined in the context of the NYSE/ARCA business model. 71 The term “allied member,” which is a regulatory category based on a person's “control” over a member organization is being eliminated because it, has likewise been rendered outdated. Category 4 includes those rules for which the only proposed substantive change is the deletion of either or both of these terms. 70 Note that there are pending amendments to certain NYSE Rules which propose deletion of the terms “allied member” and/or “member” and thus, are not included in this filing (SR-NYSE-2006-50 deletes term “member” from NYSE Rules 726 and 791; SR-NYSE-2006-111 deletes the terms “allied member” and “member” from NYSE Rule 421; and SR-NYSE-2007-06 deletes the terms “allied member” and “member” from NYSE Rule 440A. 71 For additional information, *see* Securities Exchange Act Release No. 53382 (February 27, 2006), 71 FR 11251 (March 6, 2006) (Order Approving SR-NYSE-2005-77). Member NYSE Rule 2(a) provides that the term “member,” when used to denote a natural person approved by the Exchange, means a natural person associated with a member organization who has been approved by the Exchange and designated by such member organization to effect transactions on the Floor of the Exchange or any facility thereof. This definition reflects the fact that, since the creation of NYSE Group, Inc. in 2006, “members” are not, by virtue of their membership, equity owners of NYSE Group or any of its subsidiaries. Thus, the term “member” no longer has the same regulatory meaning in the context of the NYSE/ARCA business model. Background Following the NYSE/ARCA merger, NYSE Market issued Trading Licenses that entitled their holders to have physical and electronic access to the trading facilities of NYSE Market, subject to the limitations and requirements specified in the rules of the Exchange. An organization may acquire and hold a Trading License only if and for so long as such organization is qualified and approved to be a member organization of the Exchange. Organizations that obtain licenses to trade on NYSE Market (“Trading Licenses”) are member organizations. In addition, broker-dealers that submit to the jurisdiction and rules of the Exchange, without obtaining a Trading License and thus without having rights to directly access the trading facilities of NYSE Market, will be member organizations. 72 72 *See* Footnote 71, *supra* . A member organization holding a Trading License may designate a natural person, known as a member, to effect transactions on its behalf on the floor of NYSE Market, subject to such qualification and approvals as may be required in the rules of the Exchange. Proposed Amendments The Exchange is proposing, where applicable, to delete references to the term “member” as a category of Exchange association except to the extent its usage distinguishes, from a regulatory perspective, a natural person who is licensed to trade on the Floor of the Exchange on behalf of a member organization. All other references to members will be deleted. If necessary, the term “employee” is added to rules where the current text does not otherwise capture persons acting as members. Allied Member Background In 1939, the Exchange created the category of “allied member” to make a non-member general partner of a member organization directly responsible to the Exchange and directly subject to Exchange control and discipline. The allied member designation identifies an individual who is a “control” person, including but not limited to, a principal executive officer of the member organization. Allied membership status was intended to remedy situations where disciplinary action was taken by the Exchange against member organizations because of actions of their non-member general partners for which the member organization was not entirely responsible, and over which they could not have exercised full control. NYSE Rule 2(c) currently defines the term “allied member” as a natural person who is a general partner of a member organization or other employee of a member organization who controls, 73 or is a principal executive officer of, such member organization and who has been approved by the Exchange as an allied member. 74 There currently are approximately 1,393 allied members of the Exchange. Allied membership, especially as presently administered, has no direct analogue at the NASD. 73 *See* NYSE Rule 2(f). The term “control” means the power to direct or cause the direction of the management or policies of a person whether through ownership of securities, by contract or otherwise. A person shall be presumed to control another person if such person, directly or indirectly:

(i)Has the right to vote 25 percent or more of the voting securities;

(ii)is entitled to receive 25 percent or more of the net profits; or

(iii)is a director, general partner or principal executive officer (or person occupying a similar status or performing similar functions) of the other person. Any person who does not so own voting securities, participate in profits or function as a director, general partner or principal executive officer of another person shall be presumed not to control such other person. Any presumption may be rebutted by evidence, but shall continue until a determination to the contrary has been made by the Exchange. 74 NYSE Rule 304 sets forth the eligibility requirements for allied membership. NYSE Rule 304A sets forth the examination/registration requirements for allied membership. Proposed Amendments The Exchange is proposing that the term “allied member” be deleted from both the NYSE rulebook and as a category of Exchange association as it has become outdated within the context of the new NYSE corporate structure. The Exchange is proposing to replace the term in the NYSE rulebook with the term “principal executive” to retain a means of identifying each member organization's control “persons.” The proposed designation would be defined to include persons designated by a member organization as a “principal executive officer,” as such terms is defined in subsection (b)(5) of NYSE Rule 311 (Formation and Approval of Member Organizations) or their functional equivalents. 75 75 *See* also proposed new Rule 416A.10 which defines the term “principal executive.” Rule 311(b)(5) currently states that a member organization may not be approved by the NYSE Board of Directors unless, among other things, the Board of Directors of such member organization designates its principal executive officers who shall be members or allied members and shall exercise senior principal executive responsibility over the various areas of business of such corporation in such areas that the rules of the Exchange shall prescribe, including: Operations, compliance with rules and regulations of regulatory bodies, finances and credit, sales, underwriting, research and administration. The Exchange is proposing to modify the Rule 311(b)(5) definition of principal executive officer by deleting the requirement that a principal executive officer be a member or allied member of the Exchange. Generally, throughout this filing, in instances where the provisions of a rule apply to an allied member in his or her capacity as a principal executive officer (or functional equivalent, *e.g.* , “senior officer” or “partner”) of the member organization, it is proposed that the term “principal executive” be substituted. In instances where the provisions of a rule apply to an allied member in his or her capacity as an employee of a member organization, it is proposed that the rule text be amended accordingly. The Exchange is aware that the elimination of the allied member designation raises certain issues with respect to Exchange registration requirements as well as its jurisdiction over certain member organization personnel. Specifically, once the allied member category is eliminated, the Chief Financial Officer

(CFO)and Chief Operations Officer (COO), designations which require qualification pursuant to the Series 27 (Financial and Operations Principal) or Series 28 (Broker/Dealer Financial and Operations Principal) examinations, may not be registered with the Exchange because the Exchange does not have a registration category for the Series 27 or Series 28. 76 In order to address this concern, the Exchange is proposing to recognize the NASD's requirement to use the Financial and Operations Principal CRD registration categories, Series 27/28, 77 for such exam-qualified individuals. 76 Rule 345(b) requires natural persons other than members or allied members who assume the duties of an officer with the power to bind the member or member organization to file Form U4 and receive approval of the Exchange. 77 *See* Rule 311(b)(5) interpretation in the *NYSE Interpretation Handbook* which delineates the requirements for CFO/COO of Introducing and Clearing Firms. Further, Chief Executive Officers

(CEO)are not required by Exchange rules to pass an examination; their only current qualification requirement is that they be members or become allied members. As noted above, in order to ensure regulatory jurisdiction over all principal executives, and to conform with the standard prescribed under NASD Rule 1021(a), the Exchange has proposed amendments to Rule 342 that would require each person designated by a member organization as a “principal executive,” as that term is defined in Rule 416A, to pass an examination appropriate to the functions to be performed by such person. 78 78 *See* proposed new Rule 342.13(c). Forms U4 and U5 (among other forms) will require updating in order to delete allied member registrations and to replace it with another classification for principal executive officers (or persons occupying similar status or having similar functions), voting stockholders, and employee directors. The deletion of the “allied member” category of Exchange association will not hinder the Exchange's enforcement and disciplinary efforts with respect to individuals who fall into this category. Specifically, the NYSE Division of Enforcement can assert jurisdiction absent allied member status under NYSE Rule 476 and may bring disciplinary matters based on a predicate violation pursuant to the individual's supervisory position within the member organization. An employee's status as an allied member has not been and will not be the sole or preferred route to enforcement or disciplinary actions against these individuals. Additionally, NYSE Market Surveillance, in conducting its investigations, looks at the supervision of the member organizations, its supervisory procedures and the capacity in which the individual is employed ( *i.e.* , supervisory position), not necessarily the employee's status as an allied member of the Exchange. 2. Statutory Basis The Exchange believes the statutory basis for proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange, and in particular, with the requirements of Section 6(b)(5) 79 of the Act. Section 6(b)(5) requires, among other things, that the rules of an exchange be designed to promote just and equitable principles of trade, to remove impediments to and perfect the mechanism of a free and open market and national market system, and in general, to protect investors and the public interest. The proposed changes will provide greater harmonization between Exchange and NASD rules of similar purpose, resulting in less burdensome and more efficient regulatory compliance for dual-member organizations. Where proposed amendments do not entirely conform to existing NASD rules, the Exchange believes the standards they would establish otherwise further the objectives of Section 6(b)(5) by providing greater regulatory clarity and practicality. 79 15 U.S.C. 78f(b)(5). B. Self-Regulatory Organization's Statement on Burden on Competition The Exchange does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants or Others The Exchange has neither solicited nor received written comments on the proposed rule change. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 35 days of the date of publication of this notice in the **Federal Register** or within such longer period

(i)as the Commission may designate up to 90 days of such date if it finds such longer period to be appropriate and publishes its reasons for so finding or

(ii)as to which the NYSE consents, the Commission will:

(A)By order approve such proposed rule change, or

(B)institute proceedings to determine whether the proposed rule change should be disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change 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 *rule-comments@sec.gov* . Please include File Number SR-NYSE-2007-22 on the subject line. Paper Comments • Send paper comments in triplicate to Nancy M. Morris, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090. All submissions should refer to File Number SR-NYSE-2007-22. 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, 100 F Street, NE., Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. Copies of such filing also will be available for inspection and copying at the principal office of the NYSE. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-NYSE-2007-22 and should be submitted on or before August 22, 2007. For the Commission, by the Division of Market Regulation, pursuant to delegated authority. 80 80 17 CFR 200.30-3(a)(12). Florence E. Harmon, Deputy Secretary. [FR Doc. E7-14853 Filed 7-31-07; 8:45 am] BILLING CODE 8010-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-56133; File No. SR-NYSEArca-2007-66] Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing and Order Granting Accelerated Approval of Proposed Rule Change As Modified by Amendment No. 1 Relating to Exchange Fees and Charges July 25, 2007. Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”) 1 and Rule 19b-4 thereunder, 2 notice is hereby given that on July 10, 2007, NYSE Arca, Inc. (“NYSE Arca” or “Exchange”) filed with the Securities and Exchange Commission (“Commission”) the proposed rule change as described in Items I and II below, which Items have been substantially prepared by the Exchange. On July 25, 2007, the Exchange filed Amendment No. 1 to the proposed rule change. This order provides notice of the proposed rule change, as modified by Amendment No. 1, and approves the proposed rule change, as amended, on an accelerated basis. 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b-4. I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to amend its Schedule of Fees and Charges for Exchange Services in order to extend until July 31, 2008 the current pilot program regarding transaction fees charged for trades executed through the intermarket options linkage (“Linkage”). The text of the proposed rule change is available at the Exchange, the Commission's Public Reference Room, and *http://www.nyse.com.* II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of, and basis for, the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item III below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose The purpose of this proposed rule change is to extend for one year the pilot program establishing an NYSE Arca fee for Principal Orders (“P Orders”) and Principal Acting as Agent Orders (“P/A Orders”) executed through Linkage. Fees imposed on Linkage Orders are subject to an Exchange Pilot Program that will expire July 31, 2007. This filing proposes to extend the fee through July 31, 2008. The fee that NYSE Arca charges for P Orders and P/A Orders is the basic execution fee for trading on NYSE Arca. This is the same fee that all NYSE Arca Option Trading Permit Holders pay for non-customer transactions executed on the Exchange. The Exchange does not charge for the execution of Satisfaction Orders sent through Linkage and is not proposing to charge for such orders. 2. Statutory Basis The Exchange believes that the proposal is consistent with section 6(b) of the Act 3 in general, and section 6(b)(4) of the Act 4 in particular, in that it provides for the equitable allocation of reasonable dues, fees, and other charges among its members and other persons using its facilities for the purpose of executing P Orders and P/A Orders that are routed to the Exchange from other market centers. 3 15 U.S.C. 78f(b). 4 15 U.S.C. 78f(b)(4). B. Self-Regulatory Organization's Statement on Burden on Competition The proposed rule change will not impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants or Others The Exchange has neither solicited nor received written comments on the proposed rule change. III. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change 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 *rule-comments@sec.gov.* Please include File Number SR-NYSEArca-2007-66 on the subject line. Paper Comments • Send paper comments in triplicate to Nancy M. Morris, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090. All submissions should refer to File Number SR-NYSEArca-2007-66. 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, 100 F Street, NE., Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. Copies of such filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-NYSEArca-2007-66 and should be submitted on or before August 22, 2007. IV. Commission's Findings and Order Granting Accelerated Approval of the Proposed Rule Change After careful consideration, 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, 5 and, in particular, the requirements of section 6(b) of the Act 6 and the rules and regulations thereunder. The Commission finds that the proposed rule change is consistent with section 6(b)(4) of the Act, 7 which requires that the rules of the Exchange provide for the equitable allocation of reasonable dues, fees, and other charges among its members and other persons using its facilities. The Commission believes that the extension of the Linkage fee pilot until July 31, 2008 will give the Exchange and the Commission further opportunity to evaluate whether such fees are appropriate. 5 In approving this rule change, the Commission notes that it has considered the proposal's impact on efficiency, competition, and capital formation. *See* 15 U.S.C. 78c(f). 6 15 U.S.C. 78f(b). 7 15 U.S.C. 78f(b)(4). The Commission also finds good cause for approving the proposed rule change prior to the 30th day after the date of publication of the notice of filing thereof in the **Federal Register** . The Commission believes that granting accelerated approval of the proposed rule change will preserve the Exchange's existing pilot program for Linkage fees without interruption as the Exchange and the Commission continue considering the appropriateness of Linkage fees. Therefore, the Commission finds good cause, consistent with section 19(b)(2) of the Exchange Act, 8 to approve the proposed rule change on an accelerated basis. 8 15 U.S.C. 78s(b)(2). V. Conclusion *It is therefore ordered,* pursuant to section 19(b)(2) of the Act, 9 that the proposed rule change (SR-NYSEArca-2007-66), as modified by Amendment No. 1, be, and it hereby is, approved on an accelerated basis. 9 15 U.S.C. 78s(b)(2). For the Commission, by the Division of Market Regulation, pursuant to delegated authority. 10 10 17 CFR 200.30-3(a)(12). Florence E. Harmon, Deputy Secretary. [FR Doc. E7-14838 Filed 7-31-07; 8:45 am] BILLING CODE 8010-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-56131; File No. SR-NYSEArca-2007-57] Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing and Order Granting Accelerated Approval of Proposed Rule Change To List and Trade Currency Trust Shares July 25, 2007. Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”) 1 and Rule 19b-4 thereunder, 2 notice is hereby given that on June 21, 2007, NYSE Arca, Inc. (the “Exchange”), through its wholly-owned subsidiary, NYSE Arca Equities, Inc. (“NYSE Arca Equities”), filed with the Securities and Exchange Commission (“Commission”) the proposed rule change (“Exchange Notice”) as described in Items I and II below, which Items have been substantially prepared by the Exchange. This order provides notice of the proposed rule change and approves the proposed rule change on an accelerated basis. 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b-4. I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to list and trade shares (“Shares”) of the following trusts:

(1)CurrencyShares SM Australian Dollar Trust;

(2)CurrencyShares SM British Pound Sterling Trust;

(3)CurrencyShares SM Canadian Dollar Trust;

(4)CurrencyShares SM Euro Trust (formerly, Euro Currency Trust);

(5)CurrencyShares SM Japanese Yen Trust;

(6)CurrencyShares SM Mexican Peso Trust;

(7)CurrencyShares SM Swedish Krona Trust; and

(8)CurrencyShares SM Swiss Franc Trust (individually, a “Trust,” and collectively, the “Trusts”), 3 pursuant to NYSE Arca Equities Rule 8.202. The text of the proposed rule change is available at the Exchange, the Commission's Public Reference Room, and *http://www.nyse.com.* 3 The Exchange represents that the Trusts are formed under the laws of the State of New York and are not registered under the Investment Company Act of 1940. II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item III below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose The Exchange proposes to list and trade the Shares pursuant to NYSE Arca Equities Rule 8.202, which permits the trading of Currency Trust Shares 4 either by listing or pursuant to unlisted trading privileges (“UTP”). The Shares are currently listed on the New York Stock Exchange LLC (“NYSE”), 5 and the Exchange currently trades the Shares pursuant to UTP. 6 The Shares of the Trusts will transfer their listing from NYSE to the Exchange. 7 4 As defined in NYSE Arca Equities Rule 8.202(c), “Currency Trust Shares” are securities that:

(1)Are issued by a trust that holds a specified non-U.S. currency deposited with the trust;

(2)when aggregated in some specified minimum number, may be surrendered to such trust by the beneficial owner to receive the specified non-U.S. currency; and

(3)pay to the beneficial owners interest and other distributions on the deposited non-U.S. currency, if any, declared and paid by the Trust. *See* Securities Exchange Act Release No. 53253 (February 8, 2006), 71 FR 8029 (February 15, 2006) (SR-PCX-2005-123) (approving the adoption of generic listing and trading standards for Currency Trust Shares and the trading of shares of the CurrencyShares SM Euro Trust pursuant to UTP). 5 *See* Securities Exchange Act Release Nos. 55268 (February 9, 2007), 72 FR 7793 (February 20, 2007) (SR-NYSE-2007-03) (approving the listing and trading of shares of the CurrencyShares SM Japanese Yen Trust); 54020 (June 20, 2006), 71 FR 36579 (June 27, 2006) (SR-NYSE-2006-35) (approving the listing and trading of shares of the CurrencyShares SM Australian Dollar Trust, CurrencyShares SM British Pound Sterling Trust, CurrencyShares SM Canadian Dollar Trust, CurrencyShares SM Mexican Peso Trust, CurrencyShares SM Swedish Krona Trust, and CurrencyShares SM Swiss Franc Trust); and 52843 (November 28, 2005), 70 FR 72486 (December 5, 2005) (SR-NYSE 2005-65) (approving the listing and trading of shares of the CurrencyShares SM Euro Trust) (collectively, the “NYSE Approval Orders”). 6 *See supra* note 4; Securities Exchange Act Release Nos. 55320 (February 21, 2007), 72 FR 8828 (February 27, 2007) (SR-NYSEArca-2007-15) (approving the trading of shares of the CurrencyShares SM Japanese Yen Trust pursuant to UTP); and 54043 (June 26, 2006), 71 FR 37967, (July 3, 2006) (SR-NYSEArca-2006-26) (approving the trading of shares of the CurrencyShares SM Australian Dollar Trust, CurrencyShares SM British Pound Sterling Trust, CurrencyShares SM Canadian Dollar Trust, CurrencyShares SM Mexican Peso Trust, CurrencyShares SM Swedish Krona Trust, and CurrencyShares SM Swiss Franc Trust pursuant to UTP). 7 E-mail from Timothy J. Malinowski, Director, NYSE Group, Inc., to Edward Cho, Special Counsel, Division of Market Regulation, Commission, dated July 11, 2007 (confirming the listing status of the Shares). Each Trust holds the applicable foreign currency 8 and is expected from time to time to issue Baskets 9 in exchange for deposits of the foreign currency and to distribute the foreign currency in connection with redemptions of Baskets. The Shares, which are issued by their corresponding Trust, represent units of fractional undivided beneficial interest in, and ownership of, such Trust. The investment objective of the Trusts is for the Shares to reflect the price (U.S. dollars) of the applicable foreign currency owned by the specific Trust, *plus* accrued interest, *less* the expenses and liabilities of such Trust. The Shares are intended to provide institutional and retail investors with a simple, cost-effective means of hedging their exposure to a particular foreign currency and otherwise implement investment strategies that involve foreign currencies ( *e.g.* , diversify generally against the risk that the U.S. dollar would depreciate). 8 The Trusts do not hold any derivative products. 9 A “Basket” is defined as an aggregation of 50,000 Shares. Rydex Specialized Products LLC is the sponsor of the Trusts (“Sponsor”); The Bank of New York is the trustee of the Trusts (“Trustee”); JPMorgan Chase Bank, N.A., London Branch, is the depository for the Trusts (“Depository”); and Rydex Distributors, Inc. is the distributor for the Trusts (“Distributor”). 10 A detailed discussion of the foreign exchange industry and markets, foreign currency liquidity and regulation, role and responsibilities of the Sponsor, Trustee, Distributor, and Depository, fees and expenses of the Trusts, distributions, voting and approvals, risk factors, clearance and settlement, and the procedures for creations and redemptions, and other details pertaining to the Shares, can be found in the Exchange Notice, the NYSE Approval Orders, and the Trust Prospectus (as defined below). 11 10 The Exchange represents that the Sponsor, Trustee, Distributor, and Depository are not affiliated with the Exchange or one another, with the exception that the Sponsor and Distributor are affiliated. The Exchange further represents that no compensation is paid by the Sponsor to the Distributor in connection with services performed by the Distributor for the Trusts. 11 *See supra* note 5; *see also* Prospectus Supplement No. 4, dated March 19, 2007, and Prospectus Supplement No. 2, dated January 29, 2007, for each of the CurrencyShares SM Australian Dollar Trust, CurrencyShares SM British Pound Sterling Trust, CurrencyShares SM Canadian Dollar Trust, CurrencyShares SM Mexican Peso Trust, CurrencyShares SM Swedish Krona Trust, and CurrencyShares SM Swiss Franc Trust (Registration Nos. 333-132362, 333-132361, 333-132363, 333-132367, 333-132366, and 333-132364, respectively); Prospectus Supplement No. 11, dated March 19, 2007, and Prospectus Supplement No. 7, dated January 29, 2007, for the CurrencyShares SM Euro Trust (Registration No. 333-125581); and Prospectus Supplement No. 3, dated April 3, 2007, for the CurrencyShares SM Japanese Yen Trust (Registration Nos. 333-138881 and 333-141821) (collectively, the “Trust Prospectus”). E-mail from Timothy J. Malinowski, Director, NYSE Group, Inc., to Edward Cho, Special Counsel, Division of Market Regulation, Commission, dated July 18, 2007 (confirming that additional information on the foreign currency markets, the Trust, and the Shares can be found in the Exchange Notice, NYSE Approval Orders, and the Trust Prospectus, as supplemented). Quotations and last sale price information for the Shares are disseminated over the Consolidated Tape, 12 as is the case for all equity securities traded on the Exchange (including shares of exchange-traded funds). In addition, there is a considerable amount of foreign currency price and market information available on public Web sites and through professional and subscription services. As is the case with equity securities and exchange-traded funds, in most instances, real-time information is only available for a fee, and information available free-of-charge is subject to delay (typically, 15 to 20 minutes). 12 E-mail from Timothy J. Malinowski, Director, NYSE Group, Inc., to Edward Cho, Special Counsel, Division of Market Regulation, Commission, dated July 18, 2007 (confirming the information being disseminated over the Consolidated Tape). Currently, the Consolidated Tape does not provide for dissemination of the spot price of a foreign currency over the Consolidated Tape. However, investors may obtain on a 24-hour basis foreign currency pricing information based on the foreign currency spot price of each applicable foreign currency from various financial information service providers. Current spot prices are also generally available with bid/ask spreads from foreign exchange dealers. In addition, the Trusts' Web site ( *http://www.currencyshares.com* ) provides ongoing pricing information for the applicable foreign currency spot prices and the Shares. 13 The Exchange states that complete, real-time data for foreign currency futures and options prices traded on the Chicago Mercantile Exchange (“CME”) and the Philadelphia Stock Exchange, Inc. (“Phlx”) are also available by subscription from information service providers, and that CME and Phlx also provide delayed futures and options information on current and past trading sessions and market news free of charge on their respective Web sites. 13 The Sponsor has represented that the spot price will be available on the Trust's Web site without interruption 24 hours per day, seven days per week. There are a variety of other public Web sites available at no charge that provide information on the foreign currencies underlying the Shares. Such service providers provide spot price or currency conversion information about the foreign currencies. Many of these sites offer price quotations drawn from other published sources, but because the information is supplied free-of-charge, it is generally subject to time delays. In addition, major market data vendors regularly report current currency exchange pricing for a fee for the Japanese yen and other currencies. 14 14 The Exchange notes that there may be incremental differences in the foreign currency spot price among the various information service sources. While the Exchange believes the differences in the foreign currency spot price may be relevant to those entities engaging in arbitrage or in the active daily trading of the applicable foreign currency or derivatives thereon, the Exchange believes such differences are likely of less concern to individual investors intending to hold the Shares as part of a long-term investment strategy. The Trustee calculates, and the Sponsor publishes, each Trust's net asset value, or “NAV,” and NAV per Share each business day. The Sponsor publishes the NAV and NAV per Share for each Trust on each day that the Exchange is open for regular trading on the Trusts' Web site. 15 In addition, the Trusts' Web site provides the following information:

(1)The spot price for each applicable foreign currency, 16 including the bid and offer and the midpoint between the bid and offer for the foreign currency spot price, updated every 5 to 10 seconds; 17

(2)an intraday indicative value (“IIV”) per Share, calculated by multiplying the indicative spot price of the applicable foreign currency by the quantity of foreign currency backing each Share, updated at least every 15 seconds; 18

(3)a delayed indicative value (subject to a 20 minute delay), which is used for calculating premium/discount information;

(4)premium/discount information, calculated on a 20 minute delayed basis;

(5)accrued interest per Share;

(6)the daily Federal Reserve Bank of New York Noon Buying Rate; 19

(7)the Basket Amount 20 for each applicable foreign currency; and

(8)the last sale price of the Shares as traded in the U.S. markets, subject to a 20-minute delay. 21 On the Trusts' Web site, the foreign currency spot price is available and disseminated at least every 15 seconds, and the IIV per Share will be calculated and disseminated at least every 15 seconds during NYSE Arca Marketplace's Opening, Core Trading, and Late Trading Sessions. 22 The Exchange states that it will provide on its own Web site ( *http://www.nyse.com* ) a link to the Trusts' Web site. 15 The Sponsor for the Trusts has represented to the Exchange that the NAV and the Basket Amount (as defined herein) for the Trust will be available to all market participants at the same time. 16 The Trusts' Web site's foreign currency spot prices will be provided by FactSet Research Systems ( *http://www.factset.com* ). FactSet Research Systems is not affiliated with the Trusts, Trustee, Sponsor, Depository, Distributor, or the Exchange. 17 The Sponsor calculates the midpoint price. The midpoint is used for the purpose of calculating the premium or discount of the Shares. 18 The IIV of the Shares is analogous to the intraday optimized portfolio value (sometimes referred to as “IOPV”) and indicative portfolio value associated with the trading of exchange-traded funds. The Exchange further represents that the IIV is equivalent to the Indicative Trust Value, as referenced in NYSE Arca Equities Rule 8.202(e)(2)(v), with respect to Currency Trust Shares. E-mail from Timothy J. Malinowski, Director, NYSE Group, Inc., to Edward Cho, Special Counsel, Division of Market Regulation, Commission, dated July 25, 2007 (confirming that the IIV is equivalent to the Indicative Trust Value). 19 The Federal Reserve Bank of New York Noon Buying Rate is used for the purpose of determining the NAV of each Trust. 20 A “Basket Amount” is the total deposit amount of the applicable foreign currency required to purchase a Basket of Shares. 21 The last sale price of the Shares in the secondary market is available on a real-time basis for a fee from regular data vendors. 22 Pursuant to NYSE Arca Equities Rule 7.34(a), the NYSE Arca Marketplace trading hours for exchange-traded funds are as follows:

(1)Opening Session, 4 a.m. to 9:30 a.m. Eastern Time (“ET”);

(2)Core Trading Session, 9:30 a.m. to 4:15 p.m. ET; and

(3)Late Trading Session, 4:15 p.m. to 8 p.m. ET. E-mail from Timothy J. Malinowski, Director, NYSE Group, Inc., to Edward Cho, Special Counsel, Division of Market Regulation, Commission, dated July 11, 2007 (confirming that the IIV per Share will be calculated and disseminated at least every 15 seconds during the Exchange's three trading sessions). The Exchange states that the Shares are subject to the criteria for initial and continued listing of Currency Trust Shares under NYSE Arca Equities Rule 8.202. A minimum of 100,000 Shares would be required to be outstanding when the Shares begin to trade. This minimum number of Shares required to be outstanding is comparable to requirements that have been applied to previously listed series of exchange-traded funds. The Exchange believes that the proposed minimum number of Shares outstanding at the start of trading is sufficient to provide market liquidity. 23 23 *See* NYSE Arca Equities Rule 8.202(e) (setting forth the initial and continued listing standards applicable to the Shares). *See also* Exchange Notice (providing further discussion regarding the initial and continued listing standards applicable to the Shares). The Exchange deems the Shares to be equity securities, thus rendering trading in the Shares subject to the Exchange's existing rules governing the trading of equity securities. The trading hours for the Shares on the Exchange are the same as those set forth in NYSE Arca Equities Rule 7.34 (Opening, Core Trading, and Late Trading Sessions, 4 a.m. ET to 8 p.m. ET). 24 24 *See supra* note 22. *See also* Exchange Notice (providing further discussion regarding the trading rules applicable to the Shares). With respect to trading halts, the Exchange may consider all relevant factors in exercising its discretion to halt or suspend trading in the Shares. Trading may be halted because of market conditions or for reasons that, in the view of the Exchange, make trading in the Shares inadvisable. These reasons may include

(1)The extent to which trading is not occurring in the applicable underlying foreign currency, or

(2)whether other unusual conditions or circumstances detrimental to the maintenance of a fair and orderly market are present. In addition, trading in the Shares could be halted pursuant to the Exchange's “circuit breaker” rule. 25 The Exchange further notes that, if the IIV or the value of an underlying foreign currency is not being calculated or widely disseminated as required, the Exchange may halt trading during the day in which the interruption to the calculation or wide dissemination of the IIV or the value of the underlying foreign currency occurs. If the interruption to the calculation or wide dissemination of the IIV or the value of the underlying foreign currency persists past the trading day in which it occurred, the Exchange would halt trading no later than the beginning of the trading day following the interruption. 25 *See* NYSE Arca Equities Rule 7.12 (Trading Halts Due to Extraordinary Market Volatility). The Exchange intends to utilize its existing surveillance procedures applicable to derivative products to monitor trading in the Shares. The Exchange represents that these procedures are adequate to properly monitor Exchange trading of the Shares in all trading sessions and to deter and detect violations of Exchange rules. The Exchange's current trading surveillance focuses on detecting when securities trade outside their normal patterns. When such situations are detected, surveillance analysis follows and investigations are opened, where appropriate, to review the behavior of all relevant parties for all relevant trading violations. The Exchange may also obtain information via the Intermarket Surveillance Group (“ISG”) from other exchanges that are members or affiliate members of ISG. Specifically, the Exchange can obtain key trading information from Phlx in connection with foreign currency options trading and from CME in connection with foreign currency futures trading. 26 Furthermore, the Exchange states that the Shares are subject to NYSE Arca Equities Rule 8.202(g)-(i), which set forth certain restrictions on ETP Holders 27 acting as registered market makers in the Shares to facilitate surveillance. The Exchange also has a general policy prohibiting the distribution of material, non-public information by its employees. 26 The Exchange states that Phlx is a member of ISG and CME is an affiliate member of ISG. 27 An ETP Holder is a registered broker or dealer that has been issued an Equity Trading Permit

(ETP)by NYSE Arca Equities. Prior to listing and trading the Shares, the Exchange will inform its ETP Holders in an Information Bulletin (“Bulletin”) of the special characteristics and risks associated with trading the Shares. Specifically, the Bulletin will discuss the following:

(a)The procedures for purchases and redemptions of Shares in Baskets (and that Shares are not individually redeemable);

(b)NYSE Arca Equities Rule 9.2(a), which imposes a duty of due diligence on its ETP Holders to learn the essential facts relating to every customer prior to trading the Shares;

(c)how information regarding the IIV and applicable foreign currency values is disseminated;

(d)the requirement that ETP Holders deliver a prospectus to investors purchasing newly issued Shares prior to or concurrently with the confirmation of a transaction; and

(e)other trading information. In addition, the Bulletin will reference that the Trust is subject to various fees and expenses, the number of units of the applicable foreign currency required to create a Basket or to be delivered upon redemption of a Basket may gradually decrease over time in the event that a Trust is required to withdraw or sell units of foreign currency to pay the Trust's expenses, and that if done at a time when the price of the applicable foreign currency is relatively low, it could adversely affect the value of the Shares, and that there is no regulated source of last-sale information regarding foreign currency. The Bulletin will also discuss any exemptive, no-action, and/or interpretive relief granted by the Commission from the requirements of the Act and any rules thereunder. 28 28 *See* letter from Racquel L. Russell, Branch Chief, Office of Trading Practices and Processing, Division of Market Regulation, Commission, to George T. Simon, Esq., Foley & Lardner LLP, dated June 21, 2006 (“June 21, 2006 Letter”) (granting relief from certain rules under the Act for certain of the Trusts) and letter from James A Brigagliano, Assistant Director, Division of Market Regulation, Commission, to Michael Schmidtberger, Esq., Sidley Austin Brown & Wood LLP, dated January 19, 2006 (“January 19, 2006 Letter”) (granting relief from certain rules under the Act for the DB Commodity Index Tracking Fund). The Sponsor is relying on:

(a)The June 21, 2006 Letter regarding Rule 10a-1 under the Act (17 CFR 240.10a-1), Rule 200(g) of Regulation SHO (17 CFR 242.200(g)), and Rules 101 and 102 of Regulation M under the Act (17 CFR 242.101 and 102); and

(b)the January 19, 2006 Letter regarding Section 11(d)(1) of the Act (15 U.S.C. 78k(d)(1)) and Rule 11d1-2 thereunder (17 CFR 240.11d1-2). In addition, the Exchange represents that the Trusts will not be subject to the Exchange's corporate governance requirements and the Sponsor has received guidance from the Commission regarding the application of the certification rules for periodic reporting under the Act. *See* Securities Exchange Act Release No. 48745 (November 4, 2003), 68 FR 64154 (November 12, 2003) (SR-NYSE-2002-33, *et al.* ) (noting that the corporate governance standards will not apply to, among others, passive business organizations in the form of trusts). *See also* Securities Exchange Act Release No. 47654 (April 29, 2003), 68 FR 18788 (April 16, 2003) (File No. S7-02-03) (noting that SROs may exclude from Rule 10A-3's requirements issuers that are organized as trusts or other unincorporated associations that do not have a board of directors or persons acting in a similar capacity and whose activities are limited to passively owning or holding securities, rights, collateral, or other assets on behalf of or for the benefit of the holders of the listed securities). 2. Statutory Basis The proposal is consistent with section 6(b) of the Act, 29 in general, and section 6(b)(5) of the Act, 30 in particular, in that it is designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in facilitating transactions in securities, and to remove impediments to and perfect the mechanism of a free and open market and a national market system. 29 15 U.S.C. 78f(b). 30 15 U.S.C. 78f(b)(5). B. Self-Regulatory Organization's Statement on Burden on Competition The Exchange does not believe that the proposed rule change will result in any burden on competition that is not necessary or appropriate in furtherance of the purpose of the Act. C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants or Others The Exchange has neither solicited nor received written comments on the proposed rule change. III. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change 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 *rule-comments@sec.gov.* Please include File Number SR-NYSEArca-2007-57 on the subject line. Paper Comments • Send paper comments in triplicate to Nancy M. Morris, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090. All submissions should refer to File Number SR-NYSEArca-2007-57. 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, 100 F Street, NE., Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. Copies of such filing also will be available for inspection and copying at the principal offices of the Exchange. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-NYSEArca-2007-57 and should be submitted on or before August 22, 2007. IV. Commission's Findings and Order Granting Accelerated Approval of the Proposed Rule Change 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. 31 In particular, the Commission finds that the proposed rule change is consistent with section 6(b)(5) of the Act, 32 which requires that an exchange have rules designed, among other things, 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 notes that it previously approved the original listing and trading of the Shares on NYSE, and the instant proposal is substantively identical to the previous NYSE proposals. 33 31 In approving this 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). 32 15 U.S.C. 78f(b)(5). 33 *See supra* note 5. The Commission further believes that the proposal is consistent with section 11A(a)(1)(C)(iii) of the Act, 34 which sets forth Congress' finding that it is in the public interest and appropriate for the protection of investors and the maintenance of fair and orderly markets to assure the availability to brokers, dealers, and investors of information with respect to quotations for and transactions in securities. Quotations and last sale price information for the Shares are disseminated over the Consolidated Tape. 35 The Trust disseminates the foreign currency spot prices for each of the Trusts and the IIV per Share at least every 15 seconds on its Web site during the Opening, Core Trading, and Late Trading Sessions of the Exchange. In addition, the Sponsor publishes the NAV and NAV per Share for each Trust on each day that the Exchange is open for regular trading on the Trusts' Web site. Investors may obtain on a 24-hour basis foreign currency pricing information based on the foreign currency spot price of each applicable foreign currency from various financial information service providers. Current spot prices are also generally available with bid/ask spreads from foreign exchange dealers. In addition, the Trusts' Web site provides ongoing pricing information for the applicable foreign currency spot prices and the Shares. The Exchange represents that complete, real-time data for foreign currency futures and options prices traded on CME and Phlx are also available by subscription from information service providers. CME and Phlx also provide delayed futures and options information on current and past trading sessions and market news free of charge on their respective Web sites. There are a variety of other public Web sites available at no charge that provide information on the foreign currencies underlying the Shares, including spot price or currency conversion information about the foreign currencies. In addition, the Trusts' Web site provides the following information:

(1)The spot price for each applicable foreign currency, including the bid and offer and the midpoint between the bid and offer for the foreign currency spot price, updated every 5 to 10 seconds;

(2)a delayed IIV (subject to a 20 minute delay), which is used for calculating premium/discount information;

(3)premium/discount information, calculated on a 20 minute delayed basis;

(4)accrued interest per Share;

(5)the daily Federal Reserve Bank of New York Noon Buying Rate;

(6)the Basket Amount for each applicable foreign currency; and

(7)the last sale price of the Shares as traded in the U.S. markets, subject to a 20-minute delay. The Exchange states that it will provide on its own Web site a link to the Trusts' Web site. 34 15 U.S.C. 78k-1(a)(1)(C)(iii). 35 *See supra* note 12 and accompanying text. Furthermore, the Commission believes that the proposal to list and trade the Shares is reasonably designed to promote fair disclosure of information that may be necessary to price the Shares appropriately. The Commission notes that the Sponsor has represented that, prior to listing, the NAV for each Trust would be calculated daily and made available to all market participants at the same time. 36 NYSE Arca Equities Rule 8.202(i) provides that, in connection with trading in the applicable foreign currency, options, futures or options on futures on such currency, or any other derivatives based on such currency, including Currency Trust Shares, an ETP Holder acting as a Market Maker (as defined in NYSE Arca Equities Rule 1.1(u)) in the Shares is restricted from using any material non-public information received from any person associated with such ETP Holder who is trading such foreign currency, options, futures or options on futures on such currency, or any other derivatives based on such currency. In addition, NYSE Arca Equities Rule 8.202(g) prohibits an ETP Holder acting as a registered Market Maker in the Shares from being affiliated with a market maker in the applicable foreign currency, options, futures or options on futures on such currency, or any other derivatives based on such currency, unless adequate information barriers are in place, as provided in NYSE Arca Equities Rule 7.26. 36 *See supra* note 15. The Commission also believes that the Exchange's trading halt rules are reasonably designed to prevent trading in the Shares when transparency is impaired. NYSE Arca Equities Rule 8.202(e)(2) provides that, when the Exchange is the listing market, if the value of the underlying foreign currency or IIV is no longer calculated or available on at least a 15-second delayed basis, the Exchange would consider suspending trading in the Shares. 37 NYSE Arca Equities Rule 8.202(e)(2) also provides that the Exchange may seek to delist the Shares in the event the value of the applicable foreign currency or IIV is no longer calculated or available as required. 37 *See supra* note 22. The Commission further believes that the trading rules and procedures to which the Shares will be subject pursuant to this proposal are consistent with the Act. The Exchange has represented that any securities listed pursuant to this proposal will be deemed equity securities, and subject to existing Exchange rules governing the trading of equity securities. In support of this proposal, the Exchange has made the following representations:

(1)The Exchange represents that it intends to utilize its existing surveillance procedures applicable to derivative products to monitor trading in the Shares and that such procedures are adequate to properly monitor Exchange trading of the Shares in all trading sessions and to deter and detect violations of Exchange rules. The Exchange may obtain information via ISG from other exchanges who are members or affiliates of ISG. Specifically, the Exchange can obtain such information from Phlx in connection with foreign currency options trading on Phlx and from CME in connection with foreign currency futures trading on CME.

(2)The Exchange represents that if the interruption to the calculation or wide dissemination of the value of the underlying foreign currency or IIV persists past the trading day in which it occurred, the Exchange would halt trading no later than the beginning of the trading day following the interruption.

(3)Prior to listing and trading the Shares, the Exchange represents that it will inform its ETP Holders in the Bulletin of the special characteristics and risks associated with trading the Shares. This approval order is based on the Exchange's representations. The Commission finds good cause for approving this proposal before the thirtieth day after the publication of notice thereof in the **Federal Register** . As noted above, the Commission previously approved the original listing and trading of the Shares on NYSE and the trading of the Shares pursuant to UTP on the Exchange. 38 The Commission presently is not aware of any regulatory issue that should cause it to revisit those findings or would preclude the listing and trading of the Shares on the Exchange. Accelerating approval of this proposed rule change would allow the Shares to be listed on the Exchange without undue delay and continuously traded without interruption, to the benefit of investors. 38 *See supra* notes 5 and 6. V. Conclusion *It is therefore ordered* , pursuant to section 19(b)(2) of the Act, 39 that the proposed rule change (SR-NYSEArca-2007-57) be, and it hereby is, approved on an accelerated basis. 39 15 U.S.C. 78s(b)(2). For the Commission, by the Division of Market Regulation, pursuant to delegated authority. 40 40 17 CFR 200.30-3(a)(12). Florence E. Harmon, Deputy Secretary. [FR Doc. E7-14836 Filed 7-31-07; 8:45 am] BILLING CODE 8010-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-56141; File No. SR-Phlx-2007-53] Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change as Modified by Amendment No. 1 Thereto Relating to the Extension of a Pilot Program to Quote and Trade Options in Penny Increments July 24, 2007. Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”), 1 and Rule 19b-4 thereunder, 2 notice is hereby given that on July 24, 2007, the Philadelphia Stock Exchange, Inc. (“Phlx” or “Exchange”) filed with the Securities and Exchange Commission (“Commission”) the proposed rule change asescribed in Items I and II below, which Items have been substantially prepared by the Phlx. On July 25, 2007 the Exchange filed Amendment No. 1 to the proposal. The Exchange filed the proposal as a “non-controversial” proposed rule change pursuant to section 19(b)(3)(A) of the Act 3 and Rule 19b-4(f)(6) thereunder, 4 which rendered the proposal effective upon filing with the Commission. The Commission is publishing this notice to solicit comments on the proposed rule change, as amended, from interested persons. 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b-4. 3 15 U.S.C. 78s(b)(3)(A). 4 17 CFR 240.19b-4(f)(6). I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to extend a pilot (the “Pilot”) that permits certain options series to be quoted and traded in increments of $0.01. The text of the proposed rule change is available at Phlx, the Commission's Public Reference Room, and *http://www.phlx.com.* II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Phlx included statements concerning the purpose of, and basis for, the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose The purpose of the proposed rule change is to continue to permit specified options series to be quoted and traded in increments of $0.01 by extending the Pilot through September 27, 2007. The Pilot began on January 26, 2007. 5 All series in options included in the Pilot (“Pilot Options,” listed below) trading at a price of less than $3.00 are currently quoted and traded in minimum increments of $0.01, and Pilot Options with a price of $3.00 or higher are currently quoted and traded in minimum increments of $0.05, except that options overlying the Nasdaq-100 Index Tracking Stock (“QQQQ”) 6 are quoted and traded in minimum increments of $0.01 for all series regardless of the price. A list of all Pilot Options was communicated to membership via Exchange circular. 5 *See* Securities Exchange Act Release No. 55153 (January 23, 2007), 72 FR 4553 (January 31, 2007) (SR-Phlx-2006-74). In that filing, the Exchange also made conforming amendments to various Exchange rules in order to be consistent with the pilot. These conforming changes were also approved on a six-month pilot basis. Therefore, the Exchange is proposing to extend the effective date for these rules through September 27, 2007. 6 The Nasdaq-100®, Nasdaq-100 Index®, Nasdaq®, The Nasdaq Stock Market®, Nasdaq-100 Shares SM , Nasdaq-100 Trust SM , Nasdaq-100 Index Tracking Stock SM , and QQQ SM are trademarks or service marks of The Nasdaq Stock Market, Inc. (Nasdaq) and have been licensed for use for certain purposes by the Philadelphia Stock Exchange pursuant to a License Agreement with Nasdaq. The Nasdaq-100 Index® (the Index) is determined, composed, and calculated by Nasdaq without regard to the Licensee, the Nasdaq-100 Trust SM , or the beneficial owners of Nasdaq-100 Shares SM . Nasdaq has complete control and sole discretion in determining, comprising, or calculating the Index or in modifying in any way its method for determining, comprising, or calculating the Index in the future. The options included in the Pilot are: Symbol Underlying security IWM Ishares Russell 2000. QQQQ QQQQ. SMH SemiConductor Holders. GE General Electric. AMD Advanced Micro Devices. MSFT Microsoft. INTC Intel. CAT Caterpillar. WFMI Whole Foods. TXN Texas Instruments. A Agilent Tech Inc. FLEX Flextronics International. SUNW Sun Micro. Report to the Commission Phlx Rule 1034(a)(i)(B)(2) required the Exchange to prepare and submit an analytical report (“Report”) to the Commission that addressed the impact of the first three months of the Pilot on the quality of the Exchange's markets and option quote traffic and capacity on or before the last day of the fourth month of the Pilot. The Exchange submitted the Report on May 31, 2007, within the timeframe specified in the rule. The Exchange proposes to delete Phlx Rule 1034(a)(i)(B)(2) because it is no longer applicable, and to make a technical numbering change to the rule. The Exchange anticipates that it will submit further reports as the Pilot continues. The Exchange will amend its rules accordingly. 2. Statutory Basis The Exchange believes that its proposal is consistent with section 6(b) of the Act 7 in general, and furthers the objectives of section 6(b)(5) of the Act 8 in particular, in that it is designed to promote just and equitable principles of trade, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest. 7 15 U.S.C. 78f(b). 8 15 U.S.C. 78f(b)(5). B. Self-Regulatory Organization's Statement on Burden on Competition The Exchange does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others No written comments were either solicited or received by the Exchange. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action The proposed rule change has become effective pursuant to section 19(b)(3)(A) of the Act 9 and Rule 19b-4(f)(6) thereunder, 10 because the foregoing proposed rule does not:

(i)Significantly affect the protection of investors or the public interest;

(ii)impose any significant burden on competition; and

(iii)become operative for 30 days from the date on which it was filed, or such shorter time as the Commission may designate if consistent with the protection of investors and the public interest. 9 15 U.S.C. 78s(b)(3)(A). 10 17 CFR 240.19b-4(f)(6). A proposed rule change filed under Rule 19b-4(f)(6) normally may not become operative prior to 30-days after the date of filing. 11 However, Rule 19b-4(f)(6)(iii) permits the Commission to designate a shorter time if such action is consistent with the protection of investors and the public interest. 12 The Exchange has requested that the Commission waive the 5-day notice requirement and the 30-day operative delay. The Commission believes that waiving the 5-day notice requirement and the 30-day operative delay is consistent with the protection of investors and the public interest because such waiver will ensure continuity of the Exchange's rules and will allow the Pilot to remain in effect without interruption. For these reasons, the Commission designates the proposal to be operative upon filing with the Commission. 13 11 17 CFR 240.19b-4(f)(6)(iii). In addition, Rule 19b-4(f)(6)(iii) requires the self-regulatory organization to give the Commission notice of its intent to file the proposed rule change, along with a brief description and text of the proposed rule change, at least five business days prior to the date of filing of the proposed rule change, or such shorter time as designated by the Commission. 12 17 CFR 240.19b-4(f)(6)(iii). 13 For purposes only of waiving the 30-day operative delay, the Commission has considered the proposed rule's impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f). At any time within 60 days of the filing of the proposed rule change, the Commission may summarily abrogate such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. 14 14 For purposes of calculating the 60-day period within which the Commission may summarily abrogate the proposed rule change under section 19(b)(3)(C) of the Act, the Commission considers the period to commence on July 25, 2007, the date on which Phlx submitted Amendment No. 1. *See* 15 U.S.C. 78s(b)(3)(C). IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change 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 *rule-comments@sec.gov* . Please include File Number SR-Phlx-2007-53 on the subject line. Paper Comments • Send paper comments in triplicate to Nancy M. Morris, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090. All submissions should refer to File Number SR-Phlx-2007-53. 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, 100 F Street, NE., Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. Copies of the filing also will be available for inspection and copying at the principal office of the Phlx. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-Phlx-2007-53 and should be submitted on or before August 22, 2007. For the Commission, by the Division of Market Regulation, pursuant to delegated authority. 15 15 17 CFR 200.30-3(a)(12). Florence E. Harmon, Deputy Secretary. [FR Doc. E7-14844 Filed 7-31-07; 8:45 am] BILLING CODE 8010-01-P SMALL BUSINESS ADMINISTRATION [License No. 02/72-0625] Founders Equity SBIC I, L.P.; Notice Seeking Exemption Under Section 312 of the Small Business Investment Act, Conflicts of Interest Notice is hereby given that Founders Equity SBIC I, L.P., 711 Fifth Avenue, 5th Floor, New York, New York 10022, a Federal Licensee under the Small Business Investment Act of 1958, as amended (“the Act”), in connection with the financing of a small concern, has sought an exemption under section 312 of the Act and section 107.730, Financings which Constitute Conflicts of Interest of the Small Business Administration (“SBA”) rules and regulations (13 CFR 107.730). Founders Equity SBIC I, L.P. proposes to provide convertible preferred equity security financing to Richardson Foods, Inc. (“Richardson”), 101 Erie Blvd., Canajoharie, NY 13317. The financing is contemplated to provide the company with working capital and cash to replace damaged assets. The financing is brought within the purview of Sec. 107.730(a)(1) of the Regulations because Founders Equity NY, L.P., and Associate of Founders Equity SBIC I, L.P. owns 27% of Richardson. Therefore, this transaction is considered a financing of an Associate requiring prior SBA approval. Notice is hereby given that any interested person may submit written comments on the transaction, within 15 days of the date of this publication, to the Associate Administrator for Investment, U.S. Small Business Administration, 409 Third Street, SW., Washington, DC 20416. Dated: July 23, 2007. Harry Haskins, Acting Associate Administrator for Investment. [FR Doc. 07-3753 Filed 7-31-07; 8:45 am]

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