Federal Register: December 30, 2004 (Volume 69, Number 250)

DOCID: FR Doc 04-28600

SECURITIES AND EXCHANGE COMMISSION

Securities and Exchange Commission

DOCUMENT ID: [Release No. 34-50927; File No. SR-Amex-2004-50]

NOTICE: NOTICES

ACTION: Self-regulatory organizations; proposed rule changes:

SUBJECT CATEGORY:

Self-Regulatory Organizations; Order Approving Proposed Rule Change and Amendment Nos. 1, 2, and 3 Thereto and Notice of Filing and Order Granting Accelerated Approval to Amendment Nos. 4 and 6 to the Proposed Rule Change by the American Stock Exchange LLC Relating to the National Association of Securities Dealers, Inc.'s Sale of Its Interest in the American Stock Exchange LLC to The Amex Membership Corporation

DOCUMENT SUMMARY:

December 23, 2004.

I. Introduction

On June 30, 2004, the American Stock Exchange LLC (``Amex'' or ``Exchange'') filed with the Securities and Exchange Commission (``Commission''), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934,\1\ as amended (the ``Act''), and Rule 19b4 thereunder,\2\ a proposed rule change to amend its Constitution and certain other organizational documents. On July 15, 2004, the Exchange filed Amendment No. 1 to the proposal.\3\ On July 21, 2004, the Exchange filed Amendment No. 2 to the proposal.\4\ The proposed rule change was published for comment in the Federal Register on July 28, 2004.\5\ The Commission received no comment letters regarding the proposed rule change. On August 16, 2004, Amex filed Amendment No. 3 to the proposal.\6\ On September 1, 2004, the Exchange filed Amendment No. 4 to the proposed rule change.\7\ On December 17, 2004, the Exchange filed Amendment No. 5 to the proposed rule change.\8\ The Exchange withdrew Amendment No. 5 on December 21, 2004. On December 22, 2004, the Exchange filed Amendment No. 6 to the proposed rule change.\9\ This [[Page 78487]]
order approves the proposed rule change, as amended, grants accelerated approval to Amendment Nos. 4 and 6 to the proposed rule change, and solicits comments from interested persons on Amendment Nos. 4 and 6. \1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b4.
\3\ See letter from Michael J. Ryan, Jr., Executive Vice President and General Counsel, Amex, to Nancy Sanow, Assistant Director, Division of Market Regulation (``Division''), Commission, dated July 13, 2004 (``Amendment No. 1''). Amendment No. 1 replaced Amex's original filing in its entirety.
\4\ See letter from Michael J. Ryan, Jr., Executive Vice President and General Counsel, Amex, to Nancy Sanow, Assistant Director, Division, Commission, dated July 20, 2004 (``Amendment No. 2''). Amendment No. 2 corrected formatting errors in the Amex Constitution, the Amended and Restated Exchange Limited Liability Company Agreement, the Second Restated Certificate of Incorporation of The Amex Membership Corporation, and the Amended and Restated By Laws of The Amex Membership Corporation that were filed with Amendment No. 1; no substantive changes to these documents were made in Amendment No. 2.
\5\ See Securities Exchange Act Release No. 50057 (July 22, 2004), 69 FR 45091 (the ``Amex Notice'').
\6\ See letter from Michael J. Ryan, Jr., Executive Vice President and General Counsel, Amex, to Nancy Sanow, Assistant Director, Division, Commission, dated August 13, 2004 (``Amendment No. 3''). In Amendment No. 3, Amex revised Section 2 of its Form 19b4 (Procedures of the SelfRegulatory Organization) to reflect the Exchange Board of Governors' action approving the final forms of the governance documents submitted as part of the proposal. Amendment No. 3 is a technical amendment, and, therefore, not subject to notice and comment.
\7\ See letter from Bruce Ferguson, Associate General Counsel, Amex, to Nancy Sanow, Assistant Director, Division, Commission, dated August 30, 2004 (``Amendment No. 4''). In Amendment No. 4, Amex amended Section 3 of Article II of the Amex Constitution to clarify that Exchange Board members, among other things, would be required to take into consideration the selfregulatory function of the Exchange and the Exchange's obligations (and their obligations) under the Act. Exhibit A to Amendment No. 4, which sets forth these changes, is available on the Commission's Web site (http://www.sec.gov/rules/sro.shtml ). The changes proposed in Amendment No.
4 have been incorporated into this order.
\8\ See letter from Michael J. Ryan, Jr., Executive Vice President and General Counsel, Amex, to Nancy Sanow, Assistant Director, Division, Commission, dated December 17, 2004 (``Amendment No. 5'').
\9\ See Amendment No. 6, dated December 22, 2004 (``Amendment No. 6''). Amendment No. 6 amends Sections 4(a) and 4(d) of Article II of the Amex Constitution, and related portions of Form 19b4, to provide that the Chief Regulatory Officer will report only to the Regulatory Oversight Committee. Amendment No. 6 also sets forth certain Undertakings applicable to Amex. Exhibit 5 to Amendment No. 6, which sets forth these changes to Sections 4(a) and 4(d) of Article II of the Amex Constitution and the Undertakings, is available on the Commission's Web site (http://www.sec.gov/rules/sro.shtml ). These changes and the Undertakings have been
incorporated into this order. (The Commission further notes that the Undertakings are Exhibit E to the Form 19b4.)

II. Description of Proposed Rule Change

Ownership interests in the American Stock Exchange LLC currently consist of a Class A Participation Interest held by The Amex Membership Corporation (``MC'') and a Class B Participation Interest held by New NASD Holdings, Inc. (``NAHO''), a wholly owned subsidiary of the National Association of Securities Dealers, Inc. (``NASD''). Pursuant to a proposed transaction between the parties (``Transaction''), MC will become the sole owner of the Exchange through the acquisition of 100% of the Class B Participation Interest in the Exchange from NAHO. To implement the terms of the Transaction and institute new governance structures for the Exchange and MC, the Exchange has filed amendments to its Constitution, the Second Restated Certificate of Incorporation of MC (``MC Certificate of Incorporation''), the Restated ByLaws of MC (``MC Bylaws''), and the Amended & Restated Exchange Limited Liability Company Agreement (``LLC Agreement''). Each of these documents will become effective upon the closing of the Transaction.

A. The Transaction

Through MC Acquisition Sub, a corporate subsidiary, MC will acquire 100% of the Class B Participation Interest in the Exchange from NAHO.\10\ Thus, upon consummation of the Transaction, MC will beneficially own 100% of the equity of the Exchange. Following the consummation of the Transaction, the Class B Participation Interest will represent a nonvoting interest in the Exchange; the Class A Participation Interest, which will continue to be held directly by MC, will represent the sole voting interest in the Exchange. In addition, all rights to trade through the facilities of the Exchange will continue to be owned by MC.
\10\ According to the Exchange, MC Acquisition Sub will be formed for the sole purpose of acquiring and holding the Class B Participation Interest; it is being used to avoid a technical liquidation of the Exchange as a result of the closing of the Transaction.

At the closing of the Transaction, NASD and the Exchange will restructure an existing $50 million loan owed by the Exchange to NASD. Under the terms of the arrangement, among other things, the Exchange will have the ability to satisfy all obligations under this loan in full for $25 million plus accrued interest if it is repaid within the first year following the closing of the Transaction. At the closing of the Transaction, NASD and the Exchange will enter into a Revolving Credit Facility, pursuant to which the Exchange will have the ability to borrow from NASD up to a maximum, at any one time, of $25 million.

Subject to the terms of the Transaction, the agreements relating to the 1998 transaction whereby NASD acquired the Class B Participation Interest in the Exchange (the ``1998 Transaction''), including the 1998 Transaction Agreement and the 1998 Technology Transfer Agreement, will be terminated and the 1998 Limited Liability Company Agreement of the Exchange will be amended.\11\ As the Transaction will effectively result in an unwinding of the 1998 Transaction, NASD, the Exchange, and MC will enter into certain mutual releases of obligations, including those arising under the 1998 Agreements and otherwise related to the 1998 Transaction.
\11\ See Exchange Act Release No. 40622 (October 30, 1998), 63 FR 59819 (November 5, 1998) (order approving the 1998 Transaction).

NAHO will pay in full the remaining commitment under the 1998 Seat Fund Program to the owners of regular and options principal memberships of the Exchange, which is an aggregate of approximately $17.144 million (including accrued interest) as of January 31, 2004. Such amount will be distributed pro rata to the owners of the Exchange's regular and options principal memberships, with each regular and options principal membership receiving an equal amount of approximately $20,483, plus additional accrued interest on such amount at an annual rate of 5% from January 31, 2004 through the closing of the Transaction.

The existing rights and obligations of the members regarding trading through the Exchange will not be affected by the Transaction. Trading rights will continue to be owned by MC and represent the right to trade through the facilities of the Exchange. In connection with the termination of the 1998 Transaction Agreement, the regular and options principal members will no longer have the special rights to approve material market changes to the Exchange's equity and options businesses that were put in place at the time NASD took control of the Exchange. However, under the proposed changes, no amendment to the Exchange Constitution that would result in a material change in the market structure or operations of the Exchange shall be made without first obtaining the consent from the Board of Directors of MC. In addition, as discussed below, Amex regular and options principal members will have the ability to elect the members of the Exchange Board of Governors and the MC Board of Directors.

B. LLC Agreement

The LLC Agreement will, among other things, establish the rights and obligations of MC and MC Acquisition Sub as equity owners of Amex and vest the Exchange Board with its management powers. The LLC Agreement also provides for the indemnification of any person involved in an action, suit or proceeding related to such person's affiliation with the Exchange if such person acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of Amex and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful.\12\
\12\ See Section 6.3 of the LLC Agreement.

C. Corporate Structure and Governance of the Exchange

The new governance structure for the Exchange will provide for a Board of Governors selected by the Exchange's regular and options principal members, who also will have the opportunity to vote on a ``passthrough'' basis on certain significant matters involving the Exchange, including the sale, issuance, transfer or other disposition of any equity security of the Exchange, or the issuance of any new trading rights by the Exchange. The new governance provisions also will provide that the Exchange Board of Governors will be largely independent and will have board committees composed primarily of Independent Governors, as defined below, with substantial authority over compensation, audit, regulatory and corporate governance matters, as well as the nomination of Governors to serve on the Exchange Board of Governors.

1. Board of Governors

The size of the Exchange's Board of Governors will be reduced from eighteen to fifteen Governors. Nine of the Governors will be ``Independent Governors'' and six of the Governors will be ``Industry Governors.'' An Independent Governor will be any person that is: (1) Not an officer or employee of, and has no material business relationship with, the Exchange and the holders of the Class [[Page 78488]]
A and Class B Participation Interests; (2) not a director of the holders of the Class A or Class B Participation Interest; and (3) not (i) a member, lessor or lessee of a membership, (ii) employed by, or affiliated or associated with, an entity that (x) is a member, (y) otherwise has trading rights or privileges on the Exchange or (z) is a broker or dealer, or (iii) a director, officer or employee of an issuer of securities that are listed on the Exchange.\13\ In addition, the Independent Governors will meet such additional criteria for independence or otherwise that are not inconsistent with the criteria above as may be established by the Amex Nominating and Corporate Governance Committee from time to time.\14\
\13\ See Article II, Section 1(a)(1) of the Exchange
Constitution.

\14\ See id.

Of the six Industry Governors of the Exchange, (1) two will be persons who spend a substantial portion of their time on the floor of the Exchange (the ``Floor Governors''); (2) one will be the owner of a regular or options principal membership (the ``Membership Governor''); (3) one will be affiliated with a regular or associate member organization that engages in a business having substantial direct contact with public securities customers (the ``Upstairs Governor''); (4) one will be a director, officer, employee or representative of an issuer of securities that are listed on the Exchange (the ``Listed Company Governor''); and (5) one will be the Exchange's Chief Executive Officer (the ``Management Governor'').\15\
\15\ See Article II, Section 1(a) of the Exchange Constitution.

The Chairman of the Exchange Board of Governors may be the Management Governor or any Independent Governor. If the Management Governor is designated as the Chairman of the Exchange Board of Governors, the Board will also designate an Independent Governor as the ``Lead Governor'' to preside over executive sessions of the Exchange Board of Governors (i.e., meetings of the Exchange Board of Governors without management or staff of the Exchange). The Management Governor will not participate in executive sessions. The Exchange will publicly disclose the Lead Governor's name and a means by which interested parties may communicate with the Lead Governor. If a Lead Governor has been designated by the Exchange Board of Governors, the Lead Governor will exercise the powers and discharge the duties of the Chairman in calling and presiding at meetings of the Exchange Board of Governors in the case of the absence or inability to act of the Chairman.\16\ \16\ See Article II, Section 3 of the Exchange Constitution.

All Governors elected at the annual meeting for the election of Governors will serve twoyear terms and will hold office until their successors are elected. No Governor (other than the Management Governor) who has served four consecutive terms as a Governor will be eligible for election as a Governor except after an interval of two years; provided, however, that service on the Exchange Board of Governors prior to January 1, 1999 will not be taken into account for these purposes.\17\
\17\ See Article II, Section 1(d) of the Exchange Constitution.

All nominees for election as Governor (as well as for members of the Amex Adjudicatory Council (``Council Members''),\18\ and Trustees of the Gratuity Fund (``Trustees'')) \19\ will be selected by (i) the Amex Nominating and Corporate Governance Committee or (ii) by petition of the members to the Amex Nominating and Corporate Governance Committee.\20\ The nominees for election as Governors will reflect the applicable terms of office and the classifications of Governors as set forth above.\21\ The nomination process will be as follows: \18\ See Article II, Section 7 of the Exchange Constitution for a description of the Amex Adjudicatory Council.
\19\ See Article IX of the Exchange Constitution for a description of the Gratuity Fund.
\20\ See Article III, Sections 1 and 4 of the Exchange Constitution.

\21\ See Section 1.14 of the MC Bylaws.

The members may propose nominees for Governors, Council Members, and Trustees to the Amex Nominating and Corporate Governance Committee for consideration by written submission filed with the Secretary of the Exchange for delivery to the Amex Nominating and Corporate Governance Committee not less than 12 weeks prior to the date of the annual meeting of the members. In the event that any question is raised as to whether any candidate meets the criteria for the appropriate classification, such matter shall be determined by the Amex Nominating and Corporate Governance Committee, subject to the right of appeal to the full Board of Governors.\22\
\22\ See Article III, Section 3 of the Exchange Constitution.

The Amex Nominating and Corporate Governance Committee will then report to MC at least eight weeks prior to the date of the annual meeting of the members, the names of candidates nominated by it as Governors, Council Members, and Trustees. The report of the Amex Nominating and Corporate Governance Committee will be promptly disseminated or made available to the MC members by posting or other appropriate means and will be promptly forwarded to the Secretary of MC for mailing to the members in accordance with the MC Bylaws.\23\ \23\ See Article III, Section 2 of the Exchange Constitution.

Members may also nominate candidates for Governors, Council Members, and Trustees by written petition filed with the Amex Nominating and Corporate Governance Committee within three weeks after the dissemination of the report of the Amex Nominating and Corporate Governance Committee.\24\ In the event that any question is raised as to the validity of the signatures set forth on a petition or whether any candidate meets the criteria for the appropriate classification, such matter shall be determined by the Amex Nominating and Corporate Governance Committee, subject to the right of appeal to the full Exchange Board of Governors.\25\ The persons nominated by valid petition shall be deemed nominees for the offices and positions set forth in such petition and shall be included on the ballot sent to MC by the Amex Nominating and Corporate Governance Committee. A statement of the candidates nominated by petition will be promptly disseminated or made available to the members by posting or other appropriate means and will be promptly forwarded to the Secretary of MC for mailing to the members in accordance with the MC Bylaws.\26\
\24\ See Article III, Section 4 of the Exchange Constitution. \25\ See id.
\26\ See id. The time periods set forth above may be equitably adjusted by the Amex Nominating and Corporate Governance Committee with respect to the first election of Governors occurring following April 1, 2004, to facilitate a prompt initial election; provided, however, in no event shall the petition period described in the proceeding paragraph be less than 10 business days. See Article III, Section 5 of the Exchange Constitution.

Such nominees will be voted on by the regular and options principal members, and will be elected by a plurality of votes cast by these members.\27\ Thereafter, MC will vote its
[[Page 78489]]
Class A Participation Interest in the Exchange to elect those Governors, Council Members, and Trustees selected by the regular and options principal members.\28\
\27\ See Article III, Section 1 of the Exchange Constitution and Section 1.11 of the MC Bylaws. See also Section 8 of the MC Certificate of Incorporation. Specifically, at each meeting of the members for the election of directors of MC, Governors of the Exchange, Trustees, and Council Members, such persons shall be elected by a plurality of votes cast, in person or by proxy, at such meeting by the regular and options principal members voting together as a single class and MC, as the holder of the Class A Interest of the Exchange, shall vote such Class A Interest so as to cause the election of such persons who have been so elected by the regular and options principal members.
\28\ See Section 8 of the MC Certificate of Incorporation and Section 1.11 of the MC Bylaws.

The Exchange contemplates a sixmonth transition period that will facilitate a phasein of the new governance structure of the Exchange. Accordingly, immediately following the closing of the Transaction, the Board of Governors of the Exchange will form the initial Amex Nominating and Corporate Governance Committee, which will select nominees for Governor for the first election during the sixmonth transition period. By the end of the sixmonth transition period, the regular and options principal members of the Exchange will have elected a new Board of Governors from and among these nominees or any other candidates nominated by the members through petition. At the first election of the Exchange Board of Governors during the sixmonth transition period, eight of the fifteen Governors will be elected to an initial twoyear term and the remaining seven Governors will be elected to an initial oneyear term.\29\ Thereafter, there will be an annual meeting for the election of Governors to succeed those Governors whose terms have expired.
\29\ The slate of initial eight Governors serving twoyear terms and the initial Governors serving oneyear terms shall consist of Independent Governors and Industry Governors in approximately equal proportions. The first year of each term will be extended or shortened depending upon whether the first election is held before or after July 1, 2004. See Article II, Section 1(d) of the Exchange Constitution.

The Constitution will require that each Governor, in exercising his or her powers and performing his or her duties, comply with the federal securities laws and the rules and regulations thereunder, cooperate with the Commission pursuant to its regulatory authority, and take into consideration the selfregulatory function of the Exchange, and the obligations of the Exchange (and his or her obligations) under the Act and the rules thereunder, including, without limitation, Section 6(b) \30\ of the Act.\31\
\30\ 15 U.S.C. 78f(b).
\31\ See Article II, Section 3 of the Exchange Constitution and Amendment No. 4.

2. Standing Committees of the Exchange

The Exchange Constitution will explicitly provide for a number of Standing Committees of the Exchange composed primarily or entirely of Independent Governors. Specifically, the Exchange Constitution will provide for: (i) A Nominating and Corporate Governance Committee; (ii) an Executive Committee; (iii) an Audit Committee; (iv) a Regulatory Oversight Committee; and (v) a Compensation Committee.\32\ Any power that has been delegated to any such Standing Committee may not be delegated to any other committee formed by the Exchange Board of Governors.\33\
\32\ See Article II, Section 6 of the Exchange Constitution. \33\ To establish the Standing Committees as described herein and facilitate the transition, Industry Governors may serve as members of the Standing Committees until the earlier of (i) the six month anniversary of the closing of the acquisition by MC (or MC Acquisition Sub) of the Class Participation B Interest (the ``Class B Interest Acquisition Closing Date'') or (ii) the date of the election of the Board of Governors first succeeding the Class B Interest Acquisition Closing Date. See Article II, Section 1(f) of the Exchange Constitution.

(i) Amex Nominating and Corporate Governance Committee

The Amex Nominating and Corporate Governance Committee will be appointed by the Exchange Board of Governors and will consist of three Governors, two of whom shall be Independent Governors and one of whom shall be the Membership Governor, as established by resolution adopted by a majority of the Board of Governors then in office.\34\ Any vacancy in the Amex Nominating and Corporate Governance Committee will be filled by the Committee's remaining members, who will elect a Governor qualified to fill the vacancy.
\34\ See Article II, Section 6(a) of the Exchange Constitution. The NASD Nominating Committee will cease to exist upon the closing of the Transaction.

The Amex Nominating and Corporate Governance Committee will, among other things: (i) Establish criteria and procedures for the nomination of Governors, Council Members, and Trustees; (ii) review the qualifications of and, when necessary and appropriate, interview candidates who may be proposed for nomination as, Governors, Council Members, and Trustees; (iii) submit to MC, in its capacity as the Class A Interestholder, a slate of nominees for the election of Governors, Council Members, and Trustees; (iv) monitor and consider the Exchange's corporate governance practices; (v) consider and make recommendations concerning the composition, organization, and functions of the Exchange Board of Governors; (vi) review periodically the performance of the Exchange Board of Governors; (vii) review periodically the Exchange Constitution; (viii) make periodic reports to the entire Exchange Board of Governors on such matters within its powers and responsibilities as the Exchange Board of Governors may specify; and (ix) perform such other duties in connection with the selection or election of the Governors, Council Members, and Trustees or other corporate governance matters as the Exchange Board of Governors may request.

(ii) Executive Committee

The Executive Committee will be appointed by the Exchange Board of Governors, upon the recommendation of the Amex Nominating and Corporate Governance Committee, and will consist of three to five Governors, at least a majority of whom will be Independent Governors and at least one of whom shall be an Industry Governor. The Executive Committee will have reasonable access during normal working hours to all information (including all books and records) respecting the Exchange and its assets. The Executive Committee, to the extent permitted by law, will have and may exercise, when the Exchange Board of Governors is not in session, all powers of the Exchange Board of Governors regarding the supervision of the management of the business and affairs of the Exchange.

(iii) Audit Committee

The Audit Committee will be appointed by the Exchange Board of Governors, upon the recommendation of the Amex Nominating and Corporate Governance Committee, and will consist of three to five Independent Governors. The Audit Committee will: (i) Have the authority to consider the qualification of the Exchange's independent public accountants, make recommendations to the Exchange Board of Governors as to their selection and retention, and review and resolve disputes between such independent public accountants and management relating to the preparation of the annual financial statements; (ii) confer with the Exchange's independent public accountants to determine the scope of the audit that such accountants will perform; (iii) receive reports from the independent public accountants and transmit such reports to the Exchange Board of Governors, and after the close of the fiscal year, transmit to the Exchange Board of Governors the financial statements certified by such accountants; (iv) inquire into, examine and make comments on the accounting procedures of the Exchange and the reports of the independent public accountants; (v) consider and make recommendations to the Exchange Board of Governors upon matters [[Page 78490]]
presented to it by the officers of the Exchange pertaining to the audit practices and procedures adhered to by the Exchange; (vi) appoint the internal auditors of the Exchange; and (vii) make periodic reports to the entire Exchange Board of Governors on such matters within its powers and responsibilities as the Exchange Board of Governors may specify.

The internal auditors of the Exchange will report directly to the Audit Committee, and to the extent that such internal auditors are officers or employees of the Exchange, also to the Chief Executive Officer (or the Chief Executive Officer's Designee).\35\ The internal auditors shall not be terminated without the advice and consent of the Audit Committee.
\35\ According to the Exchange, it is expected that, after the closing of the Transaction, the NASD will continue to provide the internal audit function services pursuant to a transition services agreement with the Exchange. Consequently, the internal auditors will not initially be the officers or employees of the Exchange. (iv) Regulatory Oversight Committee

The Regulatory Oversight Committee will be appointed by the Exchange Board of Governors, upon the recommendation of the Amex Nominating and Corporate Governance Committee, and will consist of three to five Independent Governors and one Industry Governor. The Independent Governors serving as members of the Regulatory Oversight Committee will be the only voting members of the committee. The Industry Governor serving as a member of the Regulatory Oversight Committee will be a nonvoting member.

The Regulatory Oversight Committee will: (i) Have authority to determine the Exchange's regulatory scheme, programs, budget and staffing proposals annually; (ii) appoint and direct the Chief Regulatory Officer; (iii) advise the Compensation Committee with respect to and approve the compensation (or any change thereto) of the Chief Regulatory Officer; (iv) be responsible for assessing regulatory performance on a regular basis; (v) have the authority to recommend the adoption of rules to the Exchange Board of Governors concerning such matters as may be specified in the Regulatory Oversight Committee's charter; and (vi) make periodic reports to the entire Exchange Board of Governors on such matters within its powers and responsibilities as the Exchange Board of Governors may specify.

Upon consummation of the Transaction, the Chief Regulatory Officer will report directly to the Regulatory Oversight Committee.\36\ The Exchange Board of Governors will have the power to remove the Chief Regulatory Officer only with the advice and consent of the Regulatory Oversight Committee.
\36\ In Amendment No. 6, Amex revised Section 4(a) and Section 4(d) of Article II of the Amex Constitution to provide that the Chief Regulatory Officer would only report to the Regulatory Oversight Committee, and not to the Chief Executive Officer (or his designee).

(v) Compensation Committee

The Compensation Committee will be appointed by the Exchange Board of Governors, upon the recommendation of the Amex Nominating and Corporate Governance Committee, and will consist of three to five Independent Governors. The Compensation Committee will have and may exercise all of the authority of the Exchange Board of Governors in administering the Exchange's management compensation plans, and will be responsible for, among other things: (i) Reviewing and approving performance goals relevant to the compensation of the Chief Executive Officer and evaluating the Chief Executive Officer's performance in achieving such goals, and recommending the compensation of the Chief Executive Officer to the Exchange Board of Governors; (ii) recommending to the Exchange Board of Governors the compensation of executive officers of the Exchange; (iii) causing to be publicly disclosed on an annual basis the compensation (and methodology behind such compensation) of the Governors and the five most highly compensated officers of the Exchange; and (iv) making periodic reports to the entire Exchange Board of Governors on such matters within its powers and responsibilities as the Exchange Board of Governors may specify. 3. Other Committees

In addition to the Standing Committees, the Exchange Board of Governors by the affirmative vote of a majority of the entire Exchange Board of Governors may delegate such of its powers as it may from time to time determine, subject to the provisions of the Constitution and applicable law, to such committee or committees as the Exchange Board of Governors may from time to time authorize; provided, however, no such delegation may be made of any power described in the Exchange Constitution provisions concerning the responsibilities of the Amex Nominating and Corporate Governance Committee, the Executive Committee, the Audit Committee, the Regulatory Oversight Committee, and the Compensation Committee.\37\ Consistent with the foregoing, the Exchange Board of Governors may assign such authority and duties to the Chief Executive Officer and to other officers and employees of the Exchange in addition to those specified in the Constitution, as the Exchange Board of Governors may from time to time determine, subject to applicable law and the provisions of the Exchange Constitution.\38\ \37\ See Article II, Section 3 of the Exchange Constitution. \38\ See id.

Under the Exchange Constitution, the Exchange Board of Governors will create and consult with the Seat Owners Advisory Committee (``SOAC''), consisting of representatives of various constituencies of the Exchange as SOAC shall deem appropriate.\39\
\39\ See id.

4. Management

The officers of the Exchange shall include a Chief Executive Officer, Treasurer, Secretary, and Chief Regulatory Officer, and such other officers as the Chief Executive Officer, subject to the approval of the Exchange Board of Governors, may appoint.\40\
\40\ See Article II, Section 4 of the Exchange Constitution. (i) Chief Executive Officer

The Chief Executive Officer will be selected by a majority of the Governors then in office. During his incumbency, the Chief Executive Officer shall have no affiliation with any member organization, or any other business interest proscribed by the Code of Conduct of the Exchange. The Chief Executive Officer shall be responsible to the Board of Governors of the Exchange for the management and administration of the affairs of the Exchange,\41\ and will be a member of the Board of Governors. The Chief Executive Officer shall have such other powers and duties in the management of the Exchange as may be determined from time to time by the Exchange Board of Governors.
\41\ The Chief Executive Officer, or such other officer as he may designate, shall prepare and present to the Board of Governors periodic reports concerning the finances, income and expenses of the Exchange, and prior to the beginning of each fiscal year of the Exchange shall present to the Board of Governors an estimate of the income of the Exchange and recommendations as to appropriations for expenses for such fiscal year. The Chief Executive Officer may at any time recommend additional appropriations or the increase or decrease of any appropriations made by the Board of Governors and shall make reports and recommendations to the Board of Governors as to the financial policy of the Exchange. See Article II, Section 4(a) of the Exchange Constitution.

All salaried officers and employees of the Exchange shall be under the
[[Page 78491]]
direction of and responsible to the Chief Executive Officer or the Chief Executive Officer's designee; provided, however, that the Chief Regulatory Officer shall report only to the Regulatory Oversight Committee and the internal auditors also shall report directly to the Audit Committee.\42\
\42\ See Article II, Section 4(d) and Article II, Section 6(c) of the Exchange Constitution.

In the case of the absence or inability to act of the Chief Executive Officer, such other person as the Board of Governors may designate shall assume all the functions and discharge all the duties of the Chief Executive Officer. In the absence of such designation by the Board of Governors, the most senior ranking officer available shall assume all such functions and discharge all such duties of the Chief Executive Officer. In case a vacancy shall occur in the office of Chief Executive Officer, the Board of Governors, by the affirmative vote of a majority of the Governors then in office, shall fill such vacancy. (ii) Chief Regulatory Officer

The Chief Regulatory Officer will be responsible for the management and administration of the regulatory functions of the Exchange and will be appointed by the Regulatory Oversight Committee.\43\ The Chief Regulatory Officer will report directly to the Regulatory Oversight Committee. The Exchange Board of Governors will have the power to remove the Chief Regulatory Officer only with the advice and consent of the Regulatory Oversight Committee.
\43\ See supra discussion under Section II.C.2(iv) ``Regulatory Oversight Committee.''

(iii) Other Officers

Subject to approval by the affirmative vote of a majority of the entire Board of Governors, the Chief Executive Officer may appoint such other officers of the Exchange, including, but not limited to, a President, Executive Vice President, Senior Vice President, and Vice President, as he may from time to time determine are required for the efficient management and operation of the Exchange, and subject to approval of a majority of the Board of Governors he shall appoint the Treasurer and the Secretary. The Chief Executive Officer shall fix the duties, responsibilities, terms and conditions of employment of officers and employees of the Exchange, other than those appointments or terms and conditions of employment that are within the power and responsibility of the Compensation Committee, the Regulatory Oversight Committee or the Audit Committee.
D. Matters Requiring Consent of MC or the Exchange Members \44\

The Exchange Constitution will prohibit the Exchange, without MC's consent, from (i) selling, issuing, transferring or otherwise disposing of any limited liability company interest or other equity security of the Exchange or any notes or debt securities of the Exchange containing equity features, (ii) issuing any new trading privileges or material new rights to holders of existing privileges, or (iii) issuing additional memberships. \45\ Any consent of MC requested by the Exchange to take such actions will only be granted by MC upon the affirmative vote of a majority of the regular memberships and the options principal memberships (voted as a single class) at a meeting duly called and convened and at which a quorum is present.\46\ In addition, without the affirmative vote of a majority of regular and options principal members, neither MC nor any affiliate of MC, including MC Acquisition Sub, may sell, issue, transfer or otherwise dispose of any equity security of the Exchange or any notes or debt securities of the Exchange containing equity features.\47\
\44\ See Article II, Section 8, Article IV, Section 1(j), and Article XIII, Section 1 of the Exchange Constitution and Sections 7, 8 and 9 of the MC Certificate of Incorporation.
\45\ See Article II, Section 8 and Article IV, Section 1(j) of the Exchange Constitution.
\46\ See Sections 7(a) and 9 of the MC Certificate of
Incorporation. Upon receiving a written request from the Exchange for an amendment to the MC Certificate of Incorporation to authorize the issuance of additional memberships of any class, the Secretary of MC shall call a meeting of the holders of memberships entitled to vote thereat to vote on such request in accordance with the MC Bylaws. Such an amendment may be authorized, and such additional memberships may be issued, only upon the affirmative vote of a majority of the regular memberships and the options principal memberships voted (as a single class) at a duly convened meeting. \47\ See Section 7(b) of the MC Certificate of Incorporation. Under the proposal, unless otherwise required by statute, by the MC Certificate of Incorporation, or by the MC Bylaws, all matters submitted to a vote of the MC members shall be decided by the vote of a majority of the Members entitled to vote and present in person or by proxy at the meeting. See Sections 1.10 and 1.11 of the MC Bylaws.

The Exchange Constitution will also provide that certain of its provisions may not be amended without the consent of the Board of Directors of MC. The provisions requiring consent from the board of MC to amend are:

  • Article II, Section 1 (Classification of the Exchange Board of Governors);
  • Article II, Section 6 (Standing Committees);
  • Article III (Nomination and Election Procedures);
  • Article XIII, Sections 1 and 3 (Procedure, Adoption of Amendments Requiring the Consent of MC); and
  • Any amendment to the Constitution that would result in a material change in the market structure or operations of the Exchange.

    Other than the provisions above, the provisions of the Exchange Constitution may be amended or repealed, and new provisions may be adopted, only if approved by a majority of Governors then in office in accordance with the procedure as specified in Article XIII of the Exchange Constitution.

    E. Amex Adjudicatory Council

    The Amex Adjudicatory Council has the authority to act for the Board of Governors with respect to any appeal or review of a disciplinary hearing, a statutory disqualification proceeding, or a membership proceeding; any review of a written stipulation of facts and consent to penalty; the exercise of any exemptive authority; and such other proceedings or actions authorized by the rules of the Exchange.\48\ The Amex Adjudicatory Council shall consist of six individuals, three of whom shall be Industry Governors (``Industry Council Members''), and three of whom shall be Independent Governors (``Independent Council Members'').\49\ All Council Members shall be nominated and elected in accordance with the procedures as described in Section II.C.1 (``Board of Governors'') above.
    \48\ See Article II, Section 7(a) of the Exchange Constitution. The Amex Board of Governors has a discretionary right of review over matters within the purview of the Amex Adjudicatory Council. \49\ See Article II, Section 7(b) of the Exchange Constitution. Under the current Exchange Constitution, the Amex Adjudicatory Council consists of three floor governors (who spend a substantial part of their time on the floor of the Exchange) and three public governors (who are the representatives of the public (i) none of whom is, or is affiliated with, a broker or dealer in securities and (ii) all of them are nominated by the NASD Nominating Committee).

    In the event that a Council Member is precluded from participating in the Council's consideration of a particular matter due to a conflict of interest, the Board of Governors shall appoint a Governor within the same classification for the position to serve as a substitute for such Council Member with respect to the particular matter. In the event that a Governor fitting the relevant classification is not available to serve as a substitute, the Board of Governors may appoint a person who would be qualified to serve as a Governor within such classification (Industry Governor or Independent Governor). If a position on the Amex Adjudicatory Council becomes vacant, whether because of
    [[Page 78492]]
    death, disability, disqualification, removal or resignation, the Board of Governors shall appoint a Governor within the same classification (Industry or Independent Council Member) to fill the vacancy until the next annual election of such Council members.\50\
    \50\ Under the current Exchange Constitution, the Board of Directors of MC was authorized to fill such vacancies.
    F. Amendments to the Exchange Constitution and the Exchange LLC Agreement

    The Amex Board would continue to be permitted to amend provisions of the Exchange Constitution by the affirmative vote of a majority of the entire Board, although, as noted above, the consent of MC's Board of Directors is needed to amend certain specified provisions of the Exchange Constitution.\51\
    \51\ See Exchange Constitution Article XIII, Section 1.

    Any amendment to or repeal of any provision of the LLC Agreement shall not be effective until the same is filed with or filed with and approved by the Commission, under Section 19 of the Act \52\ and the rules promulgated thereunder, as the case may be.\53\
    \52\ 15 U.S.C. 78s.
    \53\ See Section 11.3 of the LLC Agreement.

    G. Amex Ownership and Control

    Any sale, issuance, transfer or other disposition in any single transaction or series of transactions of (A) any limited liability company interests or other equity security of the Exchange or any securities convertible into or exchangeable for, or options rights or warrants to acquire, any such equity securities or (B) any notes or debt securities containing equity features (including, without limitation, any notes or debt securities convertible into or exchangeable for any equity securities or containing profit participation features) shall: (i) Be made only in compliance with Sections 7(a) and 7(b) of the MC Certificate of Incorporation; \54\ and (ii) be subject to prior approval by the Commission pursuant to the rule filing procedure under Section 19 of the Act,\55\ and the rules promulgated thereunder.\56\ Any attempt to issue or transfer any such equity interests or any rights thereunder in violation of these provisions shall be null and void ab initio.\57\
    \54\ Section 7(a) of the MC Certificate of Incorporation requires that the Exchange obtain the consent of MC in order to effect such sale, issuance, transfer or other disposition. MC, in turn, must obtain the approval of the regular and options principal members to grant such consent. Specifically, a majority of the regular and options principal members must approve any such sale, issuance, transfer of other disposition (voting as a single class). Section 7(b) of the MC Certificate of Incorporation provides that MC will be required to obtain the consent of the majority of the memberships entitled to vote in order for MC or an affiliate to transfer, sell or otherwise dispose of its or the affiliate's interest in the Exchange. If a proposed sale, issuance, transfer or other disposition of interest in the Exchange is not approved at the duly convened meeting convened with respect thereto, the request for such matter shall not be submitted again to the membership for a period of ninety days. See Sections 7(a) and 7(b) of the MC Certificate of Incorporation.
    \55\ 15 U.S.C. 78s.
    \56\ See Section 9.3 of the LLC Agreement.

    \57\ Id.

    In addition, any sale, issuance, transfer or other disposition in any single transaction or series of transactions of (A) any equity securities of MC or MC Acquisition Sub, or any securities convertible into or exchangeable for, or options rights or warrants to acquire, any such equity securities, or (B) any notes or debt securities containing equity features (including, without limitation, any notes or debt securities convertible into or exchangeable for any equity securities or containing profit participation features) shall be subject to prior approval by the Commission pursuant to the rule filing procedure under Section 19 of the Act \58\ and the rules promulgated thereunder; provided that the foregoing shall not apply to any sale, transfer or other disposition of seats or membership interests of the MC.\59\ Any attempt to issue or transfer such equity interest or any rights thereunder in violation of these requirements shall be null and void ab initio.\60\
    \58\ 15 U.S.C. 78s.
    \59\ See Section 7(c) of the MC Certificate of Incorporation. \60\ Id.

    H. Corporate Governance and Structure of MC

    As detailed above, after the closing of the Transaction, MC will own 100% of the equity interests in the Exchange, and MC will continue to be a membership organization of which the members are the regular and options principal members of Amex. The MC Board of Directors will be elected by the members of MC and will consist of five persons who do not necessarily serve on the Exchange Board of Governors.\61\ \61\ Under the MC Certificate of Incorporation, the purposes of MC continue to be: (i) Directly or indirectly holding, acquiring, exchanging, or disposing of equity or other interests in the Exchange and exercising the rights incident to its ownership; and (ii) to conduct and carry on only activities incidental to and in furtherance of the foregoing which may lawfully be conducted and carried on by a corporation of its type formed under the New York NotforProfit Corporation Law. See Section 3 of the MC Certificate of Incorporation.

    1. Board of Directors

    The MC Board of Directors will consist of five directors elected by the members of MC in accordance with the MC Bylaws. The MC Board of Directors will be elected for oneyear terms and will hold office until their successors are elected. No director of MC who has served eight consecutive elected terms as a director will be eligible for election as a director of MC except after an interval of two years; provided, however, that service on the Board of Directors prior to January 1, 1999 will not be taken into account for these purposes.\62\ Unless otherwise required, each matter shall be decided by a vote of a majority of the directors present at the time of the vote, provided a quorum is present.\63\ Vacancies on the MC Board of Directors may be filled for the remaining term of such vacant position by a majority vote of all remaining MC directors.\64\ The MC Bylaws will also provide limitation of liability and indemnification for MC directors and officers.\65\
    \62\ See Section 2.03 of the MC Bylaws.
    \63\ See Section 2.13 of the MC Bylaws.
    \64\ See Section 2.06 of the MC Bylaws.

    \65\ See Article VIII of the MC Bylaws.

    Under the MC Bylaws, all nominees for election as directors \66\ will be selected by either (i) the MC Nominating Committee or (ii) by petition of the members of MC to the MC Nominating Committee.\67\ The process is as follows:
    \66\ The MC Bylaws also includes the nomination procedures for Exchange Governors, Council Members, and Trustees of the Exchange, as described above in Section II.C.1 (``Board of Governors''). \67\ See Sections 1.13 of the MC Bylaws. Any person nominated by the MC Nominating Committee or by petition, whether or not such person is a Member, may be eligible to be elected to the MC Board of Directors.

    The members of MC may propose nominees for directors of MC for consideration by the MC Nominating Committee by written submission filed with the Secretary of MC for delivery to the MC Nominating Committee not less than 12 weeks prior to the annual meeting of the members of MC. The eligibility of any candidate proposed in any such submission will be determined by the MC Nominating Committee in its sole discretion and without the right of appeal.

    The MC Nominating Committee then will report to MC at least eight weeks prior to the date of the annual meeting of the members the names of candidates nominated by it as directors. Such report will be promptly disseminated or made available to members of MC by posting or other appropriate means and will be promptly forwarded to the [[Page 78493]]
    Secretary of MC for mailing to the members in accordance with the MC Bylaws.

    The members of MC also may nominate candidates for directors of MC by written petition filed with the Secretary of MC for delivery to the MC Nominating Committee within three weeks after the dissemination of the report of the MC Nominating Committee. The eligibility of any candidate nominated in any such petition will be determined by the MC Nominating Committee. A statement of the candidates nominated by petition will be promptly disseminated or made available to members of MC by posting or other appropriate means and will be promptly forwarded to the Secretary of MC for mailing to the members within three days after the dissemination in accordance with the MC Bylaws.\68\ \68\ The time periods set forth above may be equitably adjusted by the MC Nominating Committee with respect to the first election of directors occurring following Apri1 1, 2004, to facilitate a prompt initial election; provided, however, in no event shall the petition period described in the proceeding paragraph be less than 10 business days. See Section 1.13(g) of the MC Bylaws.

    2. MC Nominating Committee

    Under the MC Bylaws, the MC Nominating Committee will be appointed by the MC Board of Directors and will consist of two or three directors.\69\ Any vacancy in the MC Nominating Committee will be filled by the Committee's remaining members, who will elect a person qualified to fill the vacancy.\70\
    \69\ See Section 3.03(a) of the MC Bylaws.

    \70\ See Section 3.03(b) of the MC Bylaws.

    The MC Nominating Committee will: (i) Establish criteria and procedures for the nomination of MC directors; (ii) search for qualified nominees for submission to the members of MC for election; (iii) review the qualifications of and, when necessary and appropriate, interview candidates who may be proposed, or who are nominated by petition, as MC directors; (iv) submit to the members of MC a slate of nominees for the election of MC directors; (v) perform any and all other duties in connection with the selection, election, or termination of the MC directors as the MC Board of Directors may request; and (vi) make periodic reports to the entire Board of Directors on such matters within the Committee's powers and responsibilities as the Board of Directors may specify.\71\
    \71\ See Section 3.03(a) of the MC Bylaws.

    I. Confidential Information and Books and Records

    All books and records of the Exchange shall be kept in the United States.\72\ All confidential information of the Exchange pertaining to the selfregulatory function of the Exchange, including all books and records of the Exchange reflecting such confidential information (including but not limited to regulatory investigations, examinations, disciplinary matters, and to the extent designated by the Exchange as confidential, trading data and trading practices) will be retained in confidence by each Governor, the Exchange and its personnel, and will not be used by each Governor, the Exchange and its personnel for any nonregulatory purposes and shall not be made available to any person (including, without limitation, any members of the Exchange) except that such confidential information may be disclosed: (i) To those personnel of the Exchange and to members of the Board of Governors of the Exchange to the extent necessary or appropriate to properly discharge the selfregulatory responsibilities of the Exchange; (ii) to the extent required by applicable statute, rule or regulation or any court of competent jurisdiction; and (iii) to the extent that such confidential information has become generally available publicly through no fault of the Exchange or its Governors, officers, employees or advisors.\73\
    \72\ See Section 2.1 of the LLC Agreement. Likewise, all books and records of MC must be maintained in the United States. See Section 6.02 of the MC Bylaws.
    \73\ See Article II, Section 3 of the Exchange Constitution. In addition, this provision of the Constitution provides that confidential information of the Exchange shall be subject at all times to inspection and copying by the Commission, and that nothing in the Constitution should be interpreted as to limit or impede the rights of the Commission to access and examine such confidential information of the Exchange pursuant to the U.S. federal securities laws and the rules thereunder, or to limit or impede the ability of a Governor, the Exchange and its personnel to disclose such confidential information to the Commission.

    Also, all confidential information of Amex pertaining to the self regulatory function of Amex, including books, minutes and records of Amex reflecting such confidential information (including but not limited to regulatory investigations, examinations, disciplinary matters, and to the extent designated by Amex as confidential, trading data and practices) which shall come into the possession of MC, the officers, directors, employees or agents of MC, shall be retained in confidence by MC and the officers, directors, employees and agents of MC and shall not be used for any nonregulatory purposes.\74\ MC shall take reasonable steps to ensure that its agents will comply with this provision.\75\
    \74\ See Section 16 of the MC Certificate of Incorporation and Section 7.08 of the MC Bylaws. Nothing in the MC Certificate of Incorporation or MC Bylaws shall be interpreted as to limit or impede the rights of the Commission or Exchange to access and examine such confidential information of the Exchange pursuant to the U.S. federal securities laws and the rules thereunder, or to limit or impede the ability of a Governor, the Exchange and its personnel to disclose such confidential information to the Commission.

    \75\ See id.

    MC shall keep at the office of MC or such other locations within the United States as may from time to time be designated by its Board of Directors correct and complete books and records of account and minutes of the proceedings of its members, Board of Directors and committees, if any, and a list of the names, addresses, and classes of membership of the members.\76\ To the extent that the foregoing books, minutes and records are related to the activities of the Exchange, such books, minutes and records shall be deemed to be the books, minutes and records of the Exchange for the purposes of Section 17(b) of the Act,\77\ and shall be subject at all times to inspection and copying by the Commission and the Exchange.\78\
    \76\ See Section 12 of the MC Certificate of Incorporation and Section 6.02 of the MC Bylaws.
    \77\ 15 U.S.C. 78q(b).
    \78\ See Section 12 of the MC Certificate of Incorporation and Section 6.02 of the MC Bylaws.

    J. Commission and Amex Jurisdiction

    For so long as MC shall control, directly or indirectly, the Exchange, MC shall, and its officers, directors and employees by virtue of their acceptance of such position shall be deemed to, irrevocably submit to the exclusive jurisdiction of the United States federal courts, the Commission, and the Exchange, for the purposes of any suit, action or proceeding pursuant to the United States federal securities laws, and the rules or regulations thereunder, arising out of, or relating to the activities of the Exchange, and MC shall, and by virtue of their acceptance of any such position, the officers, directors and employees of MC shall be deemed to, waive and agree not to assert by way of motion, as a defense or otherwise in any such suit, action or proceeding, any claims that it or they are not personally subject to the jurisdiction of the Commission as to such matters, that the suit, action or proceeding is an inconvenient forum or that the venue of the suit, action or proceeding is improper, or that the subject matter [[Page 78494]]
    thereof may not be enforced in or by such courts or agency.\79\ \79\ See Section 14 of the MC Certificate of Incorporation and Section 7.06 of the MC Bylaws.

    With respect to conduct by the officers and directors of MC that relates to the activities of the Exchange, such officers and directors shall be deemed to be the officers and directors of the Exchange solely for the purposes of the removal and censure authority of the Commission pursuant to Section 19(h)(4) of the Act.\80\
    \80\ 15 U.S.C. 78s(h)(4). See Section 13 of the MC Certificate of Incorporation and Section 7.05 of the MC Bylaws.

    K. Cooperation With the Commission

    For so long as MC shall control, directly or indirectly, the Exchange, MC shall, and the officers, directors and employees of MC by virtue of their acceptance of such position shall be deemed to, agree to cooperate with the Commission and the Exchange, in respect of the Commission's oversight responsibilities regarding the Exchange and the selfregulatory functions and responsibilities of the Exchange.\81\ MC shall take reasonable steps to ensure that its agents similarly cooperate with the Commission.\82\
    \81\ See Section 15 of the MC Certificate of Incorporation and Section 7.07 of the MC Bylaws.
    \82\ See id.
    L. Additional Responsibilities of MC Officers and Directors

    For so long as MC shall control, directly or indirectly, the Exchange, each officer, director and employee of MC shall give due regard to the preservation of the independence of the selfregulatory function of the Exchange and to the Exchange's obligations under the Act, and the rules thereunder, including, without limitation, Section 6(b) of the Act,\83\ and shall not take any actions which he or she knows or reasonably should have known would interfere with the effectuation of any decisions by the Exchange Board of Governors relating to its regulatory functions (including disciplinary matters) or which would adversely affect the ability of the Exchange to carry out its responsibilities under the Act.\84\
    \83\ 15 U.S.C. 78f(b).
    \84\ See Section 13 of the MC Certificate of Incorporation and Section 7.05 of the MC Bylaws.

    M. Further Compliance

    MC shall take reasonable steps to ensure that its officers, directors, and employees comply with Sections 12 (Books and Records), 13 (Officers and Directors), 14 (Consent to Jurisdiction), 15 (Cooperation with the Commission) and 16 (Confidential Information) of the MC Certificate of Incorporation, and Sections 6.02 (Books and Records), 7.05 (Officers and Directors), 7.06 (Consent to
    Jurisdiction), 7.07 (Cooperation with the Commission) and 7.08 (Confidential Information) of the MC Bylaws, which shall include obtaining a written agreement from such individuals, as a condition to their initial or continued employment or service as a director, that they will comply with or consent to, as the case may be, such provisions.\85\
    \85\ See Section 17 of the MC Certificate of Incorporation and Section 7.09 of the MC Bylaws.
    N. Amendments to the MC Certificate of Incorporation and MC Bylaws

    Under the MC Certificate of Incorporation and the MC Bylaws, for so long as MC controls, directly or indirectly, the Exchange, before any change or addition to the MC Certificate of Incorporation or MC Bylaws shall be effective, the same shall be submitted to the Exchange Board of Governors, and if the Board shall determine that the same constitutes a ``rule of an exchange'' as such term is defined in the Act and the rules promulgated thereunder,\86\ and must be filed with or filed with and approved by the Commission before the same may be effective, under Section 19 of the Act,\87\ and the rules promulgated thereunder, then the same shall not be effective until filed with or filed with and approved by the Commission, as the case may be.\88\ \86\ See infra note 140.
    \87\ 15 U.S.C. 78s.
    \88\ See Section 18 of the MC Certificate of Incorporation and Section 9.01 of the MC Bylaws.

    O. Limitation on Distributions

    The LLC Agreement will provide that no distribution to MC and MC Acquisition Sub, as participants of the Exchange, shall include revenues received by the Exchange from regulatory fines, fees or penalties.\89\ Amex states that the purpose of this provision is to ensure that the regulatory authority of the Exchange is not used improperly to benefit the holders of the Exchange's LLC interests. \89\ See Section 4.6(c) of the LLC Agreement.

    P. Transparency

    In connection with the Transaction, both the Exchange and MC will adopt resolutions providing for greater transparency of their respective operations. Prior to each annual meeting at which Governors or directors, as the case may be, are elected, the Exchange and MC will distribute a proxy statement disclosing certain matters regarding each of their respective board's activities for the preceding year, pertinent information about the independence of Governors and directors and compensation data for the Governors and five most highly compensated officers of the Exchange.

    Q. Undertakings

    In Amendment No. 6, Amex included certain Undertakings that are applicable to Amex. These Undertakings commit Amex to (1) not terminate Amex's current regulatory services agreement with NASD unless Amex has entered into an alternative arrangement for the provision of regulatory services that has been approved by the Commission, and to use its best efforts to comply with Amex's obligations under the current regulatory services agreement, (2) confer periodically with Commission staff regarding the status of Amex's regulatory program, and (3) submit certain financial information to the Commission.\90\ The purpose of the Undertakings is to further ens

    SUMMARY:

    American Stock Exchange LLC,

    DOCUMENT BODY 2:

    December 23, 2004.

    I. Introduction

    On June 30, 2004, the American Stock Exchange LLC (``Amex'' or ``Exchange'') filed with the Securities and Exchange Commission (``Commission''), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934,\1\ as amended (the ``Act''), and Rule 19b4 thereunder,\2\ a proposed rule change to amend its Constitution and certain other organizational documents. On July 15, 2004, the Exchange filed Amendment No. 1 to the proposal.\3\ On July 21, 2004, the Exchange filed Amendment No. 2 to the proposal.\4\ The proposed rule change was published for comment in the Federal Register on July 28, 2004.\5\ The Commission received no comment letters regarding the proposed rule change. On August 16, 2004, Amex filed Amendment No. 3 to the proposal.\6\ On September 1, 2004, the Exchange filed Amendment No. 4 to the proposed rule change.\7\ On December 17, 2004, the Exchange filed Amendment No. 5 to the proposed rule change.\8\ The Exchange withdrew Amendment No. 5 on December 21, 2004. On December 22, 2004, the Exchange filed Amendment No. 6 to the proposed rule change.\9\ This [[Page 78487]]
    order approves the proposed rule change, as amended, grants accelerated approval to Amendment Nos. 4 and 6 to the proposed rule change, and solicits comments from interested persons on Amendment Nos. 4 and 6. \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b4.
    \3\ See letter from Michael J. Ryan, Jr., Executive Vice President and General Counsel, Amex, to Nancy Sanow, Assistant Director, Division of Market Regulation (``Division''), Commission, dated July 13, 2004 (``Amendment No. 1''). Amendment No. 1 replaced Amex's original filing in its entirety.
    \4\ See letter from Michael J. Ryan, Jr., Executive Vice President and General Counsel, Amex, to Nancy Sanow, Assistant Director, Division, Commission, dated July 20, 2004 (``Amendment No. 2''). Amendment No. 2 corrected formatting errors in the Amex Constitution, the Amended and Restated Exchange Limited Liability Company Agreement, the Second Restated Certificate of Incorporation of The Amex Membership Corporation, and the Amended and Restated By Laws of The Amex Membership Corporation that were filed with Amendment No. 1; no substantive changes to these documents were made in Amendment No. 2.
    \5\ See Securities Exchange Act Release No. 50057 (July 22, 2004), 69 FR 45091 (the ``Amex Notice'').
    \6\ See letter from Michael J. Ryan, Jr., Executive Vice President and General Counsel, Amex, to Nancy Sanow, Assistant Director, Division, Commission, dated August 13, 2004 (``Amendment No. 3''). In Amendment No. 3, Amex revised Section 2 of its Form 19b4 (Procedures of the SelfRegulatory Organization) to reflect the Exchange Board of Governors' action approving the final forms of the governance documents submitted as part of the proposal. Amendment No. 3 is a technical amendment, and, therefore, not subject to notice and comment.
    \7\ See letter from Bruce Ferguson, Associate General Counsel, Amex, to Nancy Sanow, Assistant Director, Division, Commission, dated August 30, 2004 (``Amendment No. 4''). In Amendment No. 4, Amex amended Section 3 of Article II of the Amex Constitution to clarify that Exchange Board members, among other things, would be required to take into consideration the selfregulatory function of the Exchange and the Exchange's obligations (and their obligations) under the Act. Exhibit A to Amendment No. 4, which sets forth these changes, is available on the Commission's Web site (http://www.sec.gov/rules/sro.shtml ). The changes proposed in Amendment No.
    4 have been incorporated into this order.
    \8\ See letter from Michael J. Ryan, Jr., Executive Vice President and General Counsel, Amex, to Nancy Sanow, Assistant Director, Division, Commission, dated December 17, 2004 (``Amendment No. 5'').
    \9\ See Amendment No. 6, dated December 22, 2004 (``Amendment No. 6''). Amendment No. 6 amends Sections 4(a) and 4(d) of Article II of the Amex Constitution, and related portions of Form 19b4, to provide that the Chief Regulatory Officer will report only to the Regulatory Oversight Committee. Amendment No. 6 also sets forth certain Undertakings applicable to Amex. Exhibit 5 to Amendment No. 6, which sets forth these changes to Sections 4(a) and 4(d) of Article II of the Amex Constitution and the Undertakings, is available on the Commission's Web site (http://www.sec.gov/rules/sro.shtml ). These changes and the Undertakings have been
    incorporated into this order. (The Commission further notes that the Undertakings are Exhibit E to the Form 19b4.)

    II. Description of Proposed Rule Change

    Ownership interests in the American Stock Exchange LLC currently consist of a Class A Participation Interest held by The Amex Membership Corporation (``MC'') and a Class B Participation Interest held by New NASD Holdings, Inc. (``NAHO''), a wholly owned subsidiary of the National Association of Securities Dealers, Inc. (``NASD''). Pursuant to a proposed transaction between the parties (``Transaction''), MC will become the sole owner of the Exchange through the acquisition of 100% of the Class B Participation Interest in the Exchange from NAHO. To implement the terms of the Transaction and institute new governance structures for the Exchange and MC, the Exchange has filed amendments to its Constitution, the Second Restated Certificate of Incorporation of MC (``MC Certificate of Incorporation''), the Restated ByLaws of MC (``MC Bylaws''), and the Amended & Restated Exchange Limited Liability Company Agreement (``LLC Agreement''). Each of these documents will become effective upon the closing of the Transaction.

    A. The Transaction

    Through MC Acquisition Sub, a corporate subsidiary, MC will acquire 100% of the Class B Participation Interest in the Exchange from NAHO.\10\ Thus, upon consummation of the Transaction, MC will beneficially own 100% of the equity of the Exchange. Following the consummation of the Transaction, the Class B Participation Interest will represent a nonvoting interest in the Exchange; the Class A Participation Interest, which will continue to be held directly by MC, will represent the sole voting interest in the Exchange. In addition, all rights to trade through the facilities of the Exchange will continue to be owned by MC.
    \10\ According to the Exchange, MC Acquisition Sub will be formed for the sole purpose of acquiring and holding the Class B Participation Interest; it is being used to avoid a technical liquidation of the Exchange as a result of the closing of the Transaction.

    At the closing of the Transaction, NASD and the Exchange will restructure an existing $50 million loan owed by the Exchange to NASD. Under the terms of the arrangement, among other things, the Exchange will have the ability to satisfy all obligations under this loan in full for $25 million plus accrued interest if it is repaid within the first year following the closing of the Transaction. At the closing of the Transaction, NASD and the Exchange will enter into a Revolving Credit Facility, pursuant to which the Exchange will have the ability to borrow from NASD up to a maximum, at any one time, of $25 million.

    Subject to the terms of the Transaction, the agreements relating to the 1998 transaction whereby NASD acquired the Class B Participation Interest in the Exchange (the ``1998 Transaction''), including the 1998 Transaction Agreement and the 1998 Technology Transfer Agreement, will be terminated and the 1998 Limited Liability Company Agreement of the Exchange will be amended.\11\ As the Transaction will effectively result in an unwinding of the 1998 Transaction, NASD, the Exchange, and MC will enter into certain mutual releases of obligations, including those arising under the 1998 Agreements and otherwise related to the 1998 Transaction.
    \11\ See Exchange Act Release No. 40622 (October 30, 1998), 63 FR 59819 (November 5, 1998) (order approving the 1998 Transaction).

    NAHO will pay in full the remaining commitment under the 1998 Seat Fund Program to the owners of regular and options principal memberships of the Exchange, which is an aggregate of approximately $17.144 million (including accrued interest) as of January 31, 2004. Such amount will be distributed pro rata to the owners of the Exchange's regular and options principal memberships, with each regular and options principal membership receiving an equal amount of approximately $20,483, plus additional accrued interest on such amount at an annual rate of 5% from January 31, 2004 through the closing of the Transaction.

    The existing rights and obligations of the members regarding trading through the Exchange will not be affected by the Transaction. Trading rights will continue to be owned by MC and represent the right to trade through the facilities of the Exchange. In connection with the termination of the 1998 Transaction Agreement, the regular and options principal members will no longer have the special rights to approve material market changes to the Exchange's equity and options businesses that were put in place at the time NASD took control of the Exchange. However, under the proposed changes, no amendment to the Exchange Constitution that would result in a material change in the market structure or operations of the Exchange shall be made without first obtaining the consent from the Board of Directors of MC. In addition, as discussed below, Amex regular and options principal members will have the ability to elect the members of the Exchange Board of Governors and the MC Board of Directors.

    B. LLC Agreement

    The LLC Agreement will, among other things, establish the rights and obligations of MC and MC Acquisition Sub as equity owners of Amex and vest the Exchange Board with its management powers. The LLC Agreement also provides for the indemnification of any person involved in an action, suit or proceeding related to such person's affiliation with the Exchange if such person acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of Amex and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful.\12\
    \12\ See Section 6.3 of the LLC Agreement.

    C. Corporate Structure and Governance of the Exchange

    The new governance structure for the Exchange will provide for a Board of Governors selected by the Exchange's regular and options principal members, who also will have the opportunity to vote on a ``passthrough'' basis on certain significant matters involving the Exchange, including the sale, issuance, transfer or other disposition of any equity security of the Exchange, or the issuance of any new trading rights by the Exchange. The new governance provisions also will provide that the Exchange Board of Governors will be largely independent and will have board committees composed primarily of Independent Governors, as defined below, with substantial authority over compensation, audit, regulatory and corporate governance matters, as well as the nomination of Governors to serve on the Exchange Board of Governors.

    1. Board of Governors

    The size of the Exchange's Board of Governors will be reduced from eighteen to fifteen Governors. Nine of the Governors will be ``Independent Governors'' and six of the Governors will be ``Industry Governors.'' An Independent Governor will be any person that is: (1) Not an officer or employee of, and has no material business relationship with, the Exchange and the holders of the Class [[Page 78488]]
    A and Class B Participation Interests; (2) not a director of the holders of the Class A or Class B Participation Interest; and (3) not (i) a member, lessor or lessee of a membership, (ii) employed by, or affiliated or associated with, an entity that (x) is a member, (y) otherwise has trading rights or privileges on the Exchange or (z) is a broker or dealer, or (iii) a director, officer or employee of an issuer of securities that are listed on the Exchange.\13\ In addition, the Independent Governors will meet such additional criteria for independence or otherwise that are not inconsistent with the criteria above as may be established by the Amex Nominating and Corporate Governance Committee from time to time.\14\
    \13\ See Article II, Section 1(a)(1) of the Exchange
    Constitution.

    \14\ See id.

    Of the six Industry Governors of the Exchange, (1) two will be persons who spend a substantial portion of their time on the floor of the Exchange (the ``Floor Governors''); (2) one will be the owner of a regular or options principal membership (the ``Membership Governor''); (3) one will be affiliated with a regular or associate member organization that engages in a business having substantial direct contact with public securities customers (the ``Upstairs Governor''); (4) one will be a director, officer, employee or representative of an issuer of securities that are listed on the Exchange (the ``Listed Company Governor''); and (5) one will be the Exchange's Chief Executive Officer (the ``Management Governor'').\15\
    \15\ See Article II, Section 1(a) of the Exchange Constitution.

    The Chairman of the Exchange Board of Governors may be the Management Governor or any Independent Governor. If the Management Governor is designated as the Chairman of the Exchange Board of Governors, the Board will also designate an Independent Governor as the ``Lead Governor'' to preside over executive sessions of the Exchange Board of Governors (i.e., meetings of the Exchange Board of Governors without management or staff of the Exchange). The Management Governor will not participate in executive sessions. The Exchange will publicly disclose the Lead Governor's name and a means by which interested parties may communicate with the Lead Governor. If a Lead Governor has been designated by the Exchange Board of Governors, the Lead Governor will exercise the powers and discharge the duties of the Chairman in calling and presiding at meetings of the Exchange Board of Governors in the case of the absence or inability to act of the Chairman.\16\ \16\ See Article II, Section 3 of the Exchange Constitution.

    All Governors elected at the annual meeting for the election of Governors will serve twoyear terms and will hold office until their successors are elected. No Governor (other than the Management Governor) who has served four consecutive terms as a Governor will be eligible for election as a Governor except after an interval of two years; provided, however, that service on the Exchange Board of Governors prior to January 1, 1999 will not be taken into account for these purposes.\17\
    \17\ See Article II, Section 1(d) of the Exchange Constitution.

    All nominees for election as Governor (as well as for members of the Amex Adjudicatory Council (``Council Members''),\18\ and Trustees of the Gratuity Fund (``Trustees'')) \19\ will be selected by (i) the Amex Nominating and Corporate Governance Committee or (ii) by petition of the members to the Amex Nominating and Corporate Governance Committee.\20\ The nominees for election as Governors will reflect the applicable terms of office and the classifications of Governors as set forth above.\21\ The nomination process will be as follows: \18\ See Article II, Section 7 of the Exchange Constitution for a description of the Amex Adjudicatory Council.
    \19\ See Article IX of the Exchange Constitution for a description of the Gratuity Fund.
    \20\ See Article III, Sections 1 and 4 of the Exchange Constitution.

    \21\ See Section 1.14 of the MC Bylaws.

    The members may propose nominees for Governors, Council Members, and Trustees to the Amex Nominating and Corporate Governance Committee for consideration by written submission filed with the Secretary of the Exchange for delivery to the Amex Nominating and Corporate Governance Committee not less than 12 weeks prior to the date of the annual meeting of the members. In the event that any question is raised as to whether any candidate meets the criteria for the appropriate classification, such matter shall be determined by the Amex Nominating and Corporate Governance Committee, subject to the right of appeal to the full Board of Governors.\22\
    \22\ See Article III, Section 3 of the Exchange Constitution.

    The Amex Nominating and Corporate Governance Committee will then report to MC at least eight weeks prior to the date of the annual meeting of the members, the names of candidates nominated by it as Governors, Council Members, and Trustees. The report of the Amex Nominating and Corporate Governance Committee will be promptly disseminated or made available to the MC members by posting or other appropriate means and will be promptly forwarded to the Secretary of MC for mailing to the members in accordance with the MC Bylaws.\23\ \23\ See Article III, Section 2 of the Exchange Constitution.

    Members may also nominate candidates for Governors, Council Members, and Trustees by written petition filed with the Amex Nominating and Corporate Governance Committee within three weeks after the dissemination of the report of the Amex Nominating and Corporate Governance Committee.\24\ In the event that any question is raised as to the validity of the signatures set forth on a petition or whether any candidate meets the criteria for the appropriate classification, such matter shall be determined by the Amex Nominating and Corporate Governance Committee, subject to the right of appeal to the full Exchange Board of Governors.\25\ The persons nominated by valid petition shall be deemed nominees for the offices and positions set forth in such petition and shall be included on the ballot sent to MC by the Amex Nominating and Corporate Governance Committee. A statement of the candidates nominated by petition will be promptly disseminated or made available to the members by posting or other appropriate means and will be promptly forwarded to the Secretary of MC for mailing to the members in accordance with the MC Bylaws.\26\
    \24\ See Article III, Section 4 of the Exchange Constitution. \25\ See id.
    \26\ See id. The time periods set forth above may be equitably adjusted by the Amex Nominating and Corporate Governance Committee with respect to the first election of Governors occurring following April 1, 2004, to facilitate a prompt initial election; provided, however, in no event shall the petition period described in the proceeding paragraph be less than 10 business days. See Article III, Section 5 of the Exchange Constitution.

    Such nominees will be voted on by the regular and options principal members, and will be elected by a plurality of votes cast by these members.\27\ Thereafter, MC will vote its
    [[Page 78489]]
    Class A Participation Interest in the Exchange to elect those Governors, Council Members, and Trustees selected by the regular and options principal members.\28\
    \27\ See Article III, Section 1 of the Exchange Constitution and Section 1.11 of the MC Bylaws. See also Section 8 of the MC Certificate of Incorporation. Specifically, at each meeting of the members for the election of directors of MC, Governors of the Exchange, Trustees, and Council Members, such persons shall be elected by a plurality of votes cast, in person or by proxy, at such meeting by the regular and options principal members voting together as a single class and MC, as the holder of the Class A Interest of the Exchange, shall vote such Class A Interest so as to cause the election of such persons who have been so elected by the regular and options principal members.
    \28\ See Section 8 of the MC Certificate of Incorporation and Section 1.11 of the MC Bylaws.

    The Exchange contemplates a sixmonth transition period that will facilitate a phasein of the new governance structure of the Exchange. Accordingly, immediately following the closing of the Transaction, the Board of Governors of the Exchange will form the initial Amex Nominating and Corporate Governance Committee, which will select nominees for Governor for the first election during the sixmonth transition period. By the end of the sixmonth transition period, the regular and options principal members of the Exchange will have elected a new Board of Governors from and among these nominees or any other candidates nominated by the members through petition. At the first election of the Exchange Board of Governors during the sixmonth transition period, eight of the fifteen Governors will be elected to an initial twoyear term and the remaining seven Governors will be elected to an initial oneyear term.\29\ Thereafter, there will be an annual meeting for the election of Governors to succeed those Governors whose terms have expired.
    \29\ The slate of initial eight Governors serving twoyear terms and the initial Governors serving oneyear terms shall consist of Independent Governors and Industry Governors in approximately equal proportions. The first year of each term will be extended or shortened depending upon whether the first election is held before or after July 1, 2004. See Article II, Section 1(d) of the Exchange Constitution.

    The Constitution will require that each Governor, in exercising his or her powers and performing his or her duties, comply with the federal securities laws and the rules and regulations thereunder, cooperate with the Commission pursuant to its regulatory authority, and take into consideration the selfregulatory function of the Exchange, and the obligations of the Exchange (and his or her obligations) under the Act and the rules thereunder, including, without limitation, Section 6(b) \30\ of the Act.\31\
    \30\ 15 U.S.C. 78f(b).
    \31\ See Article II, Section 3 of the Exchange Constitution and Amendment No. 4.

    2. Standing Committees of the Exchange

    The Exchange Constitution will explicitly provide for a number of Standing Committees of the Exchange composed primarily or entirely of Independent Governors. Specifically, the Exchange Constitution will provide for: (i) A Nominating and Corporate Governance Committee; (ii) an Executive Committee; (iii) an Audit Committee; (iv) a Regulatory Oversight Committee; and (v) a Compensation Committee.\32\ Any power that has been delegated to any such Standing Committee may not be delegated to any other committee formed by the Exchange Board of Governors.\33\
    \32\ See Article II, Section 6 of the Exchange Constitution. \33\ To establish the Standing Committees as described herein and facilitate the transition, Industry Governors may serve as members of the Standing Committees until the earlier of (i) the six month anniversary of the closing of the acquisition by MC (or MC Acquisition Sub) of the Class Participation B Interest (the ``Class B Interest Acquisition Closing Date'') or (ii) the date of the election of the Board of Governors first succeeding the Class B Interest Acquisition Closing Date. See Article II, Section 1(f) of the Exchange Constitution.

    (i) Amex Nominating and Corporate Governance Committee

    The Amex Nominating and Corporate Governance Committee will be appointed by the Exchange Board of Governors and will consist of three Governors, two of whom shall be Independent Governors and one of whom shall be the Membership Governor, as established by resolution adopted by a majority of the Board of Governors then in office.\34\ Any vacancy in the Amex Nominating and Corporate Governance Committee will be filled by the Committee's remaining members, who will elect a Governor qualified to fill the vacancy.
    \34\ See Article II, Section 6(a) of the Exchange Constitution. The NASD Nominating Committee will cease to exist upon the closing of the Transaction.

    The Amex Nominating and Corporate Governance Committee will, among other things: (i) Establish criteria and procedures for the nomination of Governors, Council Members, and Trustees; (ii) review the qualifications of and, when necessary and appropriate, interview candidates who may be proposed for nomination as, Governors, Council Members, and Trustees; (iii) submit to MC, in its capacity as the Class A Interestholder, a slate of nominees for the election of Governors, Council Members, and Trustees; (iv) monitor and consider the Exchange's corporate governance practices; (v) consider and make recommendations concerning the composition, organization, and functions of the Exchange Board of Governors; (vi) review periodically the performance of the Exchange Board of Governors; (vii) review periodically the Exchange Constitution; (viii) make periodic reports to the entire Exchange Board of Governors on such matters within its powers and responsibilities as the Exchange Board of Governors may specify; and (ix) perform such other duties in connection with the selection or election of the Governors, Council Members, and Trustees or other corporate governance matters as the Exchange Board of Governors may request.

    (ii) Executive Committee

    The Executive Committee will be appointed by the Exchange Board of Governors, upon the recommendation of the Amex Nominating and Corporate Governance Committee, and will consist of three to five Governors, at least a majority of whom will be Independent Governors and at least one of whom shall be an Industry Governor. The Executive Committee will have reasonable access during normal working hours to all information (including all books and records) respecting the Exchange and its assets. The Executive Committee, to the extent permitted by law, will have and may exercise, when the Exchange Board of Governors is not in session, all powers of the Exchange Board of Governors regarding the supervision of the management of the business and affairs of the Exchange.

    (iii) Audit Committee

    The Audit Committee will be appointed by the Exchange Board of Governors, upon the recommendation of the Amex Nominating and Corporate Governance Committee, and will consist of three to five Independent Governors. The Audit Committee will: (i) Have the authority to consider the qualification of the Exchange's independent public accountants, make recommendations to the Exchange Board of Governors as to their selection and retention, and review and resolve disputes between such independent public accountants and management relating to the preparation of the annual financial statements; (ii) confer with the Exchange's independent public accountants to determine the scope of the audit that such accountants will perform; (iii) receive reports from the independent public accountants and transmit such reports to the Exchange Board of Governors, and after the close of the fiscal year, transmit to the Exchange Board of Governors the financial statements certified by such accountants; (iv) inquire into, examine and make comments on the accounting procedures of the Exchange and the reports of the independent public accountants; (v) consider and make recommendations to the Exchange Board of Governors upon matters [[Page 78490]]
    presented to it by the officers of the Exchange pertaining to the audit practices and procedures adhered to by the Exchange; (vi) appoint the internal auditors of the Exchange; and (vii) make periodic reports to the entire Exchange Board of Governors on such matters within its powers and responsibilities as the Exchange Board of Governors may specify.

    The internal auditors of the Exchange will report directly to the Audit Committee, and to the extent that such internal auditors are officers or employees of the Exchange, also to the Chief Executive Officer (or the Chief Executive Officer's Designee).\35\ The internal auditors shall not be terminated without the advice and consent of the Audit Committee.
    \35\ According to the Exchange, it is expected that, after the closing of the Transaction, the NASD will continue to provide the internal audit function services pursuant to a transition services agreement with the Exchange. Consequently, the internal auditors will not initially be the officers or employees of the Exchange. (iv) Regulatory Oversight Committee

    The Regulatory Oversight Committee will be appointed by the Exchange Board of Governors, upon the recommendation of the Amex Nominating and Corporate Governance Committee, and will consist of three to five Independent Governors and one Industry Governor. The Independent Governors serving as members of the Regulatory Oversight Committee will be the only voting members of the committee. The Industry Governor serving as a member of the Regulatory Oversight Committee will be a nonvoting member.

    The Regulatory Oversight Committee will: (i) Have authority to determine the Exchange's regulatory scheme, programs, budget and staffing proposals annually; (ii) appoint and direct the Chief Regulatory Officer; (iii) advise the Compensation Committee with respect to and approve the compensation (or any change thereto) of the Chief Regulatory Officer; (iv) be responsible for assessing regulatory performance on a regular basis; (v) have the authority to recommend the adoption of rules to the Exchange Board of Governors concerning such matters as may be specified in the Regulatory Oversight Committee's charter; and (vi) make periodic reports to the entire Exchange Board of Governors on such matters within its powers and responsibilities as the Exchange Board of Governors may specify.

    Upon consummation of the Transaction, the Chief Regulatory Officer will report directly to the Regulatory Oversight Committee.\36\ The Exchange Board of Governors will have the power to remove the Chief Regulatory Officer only with the advice and consent of the Regulatory Oversight Committee.
    \36\ In Amendment No. 6, Amex revised Section 4(a) and Section 4(d) of Article II of the Amex Constitution to provide that the Chief Regulatory Officer would only report to the Regulatory Oversight Committee, and not to the Chief Executive Officer (or his designee).

    (v) Compensation Committee

    The Compensation Committee will be appointed by the Exchange Board of Governors, upon the recommendation of the Amex Nominating and Corporate Governance Committee, and will consist of three to five Independent Governors. The Compensation Committee will have and may exercise all of the authority of the Exchange Board of Governors in administering the Exchange's management compensation plans, and will be responsible for, among other things: (i) Reviewing and approving performance goals relevant to the compensation of the Chief Executive Officer and evaluating the Chief Executive Officer's performance in achieving such goals, and recommending the compensation of the Chief Executive Officer to the Exchange Board of Governors; (ii) recommending to the Exchange Board of Governors the compensation of executive officers of the Exchange; (iii) causing to be publicly disclosed on an annual basis the compensation (and methodology behind such compensation) of the Governors and the five most highly compensated officers of the Exchange; and (iv) making periodic reports to the entire Exchange Board of Governors on such matters within its powers and responsibilities as the Exchange Board of Governors may specify. 3. Other Committees

    In addition to the Standing Committees, the Exchange Board of Governors by the affirmative vote of a majority of the entire Exchange Board of Governors may delegate such of its powers as it may from time to time determine, subject to the provisions of the Constitution and applicable law, to such committee or committees as the Exchange Board of Governors may from time to time authorize; provided, however, no such delegation may be made of any power described in the Exchange Constitution provisions concerning the responsibilities of the Amex Nominating and Corporate Governance Committee, the Executive Committee, the Audit Committee, the Regulatory Oversight Committee, and the Compensation Committee.\37\ Consistent with the foregoing, the Exchange Board of Governors may assign such authority and duties to the Chief Executive Officer and to other officers and employees of the Exchange in addition to those specified in the Constitution, as the Exchange Board of Governors may from time to time determine, subject to applicable law and the provisions of the Exchange Constitution.\38\ \37\ See Article II, Section 3 of the Exchange Constitution. \38\ See id.

    Under the Exchange Constitution, the Exchange Board of Governors will create and consult with the Seat Owners Advisory Committee (``SOAC''), consisting of representatives of various constituencies of the Exchange as SOAC shall deem appropriate.\39\
    \39\ See id.

    4. Management

    The officers of the Exchange shall include a Chief Executive Officer, Treasurer, Secretary, and Chief Regulatory Officer, and such other officers as the Chief Executive Officer, subject to the approval of the Exchange Board of Governors, may appoint.\40\
    \40\ See Article II, Section 4 of the Exchange Constitution. (i) Chief Executive Officer

    The Chief Executive Officer will be selected by a majority of the Governors then in office. During his incumbency, the Chief Executive Officer shall have no affiliation with any member organization, or any other business interest proscribed by the Code of Conduct of the Exchange. The Chief Executive Officer shall be responsible to the Board of Governors of the Exchange for the management and administration of the affairs of the Exchange,\41\ and will be a member of the Board of Governors. The Chief Executive Officer shall have such other powers and duties in the management of the Exchange as may be determined from time to time by the Exchange Board of Governors.
    \41\ The Chief Executive Officer, or such other officer as he may designate, shall prepare and present to the Board of Governors periodic reports concerning the finances, income and expenses of the Exchange, and prior to the beginning of each fiscal year of the Exchange shall present to the Board of Governors an estimate of the income of the Exchange and recommendations as to appropriations for expenses for such fiscal year. The Chief Executive Officer may at any time recommend additional appropriations or the increase or decrease of any appropriations made by the Board of Governors and shall make reports and recommendations to the Board of Governors as to the financial policy of the Exchange. See Article II, Section 4(a) of the Exchange Constitution.

    All salaried officers and employees of the Exchange shall be under the
    [[Page 78491]]
    direction of and responsible to the Chief Executive Officer or the Chief Executive Officer's designee; provided, however, that the Chief Regulatory Officer shall report only to the Regulatory Oversight Committee and the internal auditors also shall report directly to the Audit Committee.\42\
    \42\ See Article II, Section 4(d) and Article II, Section 6(c) of the Exchange Constitution.

    In the case of the absence or inability to act of the Chief Executive Officer, such other person as the Board of Governors may designate shall assume all the functions and discharge all the duties of the Chief Executive Officer. In the absence of such designation by the Board of Governors, the most senior ranking officer available shall assume all such functions and discharge all such duties of the Chief Executive Officer. In case a vacancy shall occur in the office of Chief Executive Officer, the Board of Governors, by the affirmative vote of a majority of the Governors then in office, shall fill such vacancy. (ii) Chief Regulatory Officer

    The Chief Regulatory Officer will be responsible for the management and administration of the regulatory functions of the Exchange and will be appointed by the Regulatory Oversight Committee.\43\ The Chief Regulatory Officer will report directly to the Regulatory Oversight Committee. The Exchange Board of Governors will have the power to remove the Chief Regulatory Officer only with the advice and consent of the Regulatory Oversight Committee.
    \43\ See supra discussion under Section II.C.2(iv) ``Regulatory Oversight Committee.''

    (iii) Other Officers

    Subject to approval by the affirmative vote of a majority of the entire Board of Governors, the Chief Executive Officer may appoint such other officers of the Exchange, including, but not limited to, a President, Executive Vice President, Senior Vice President, and Vice President, as he may from time to time determine are required for the efficient management and operation of the Exchange, and subject to approval of a majority of the Board of Governors he shall appoint the Treasurer and the Secretary. The Chief Executive Officer shall fix the duties, responsibilities, terms and conditions of employment of officers and employees of the Exchange, other than those appointments or terms and conditions of employment that are within the power and responsibility of the Compensation Committee, the Regulatory Oversight Committee or the Audit Committee.
    D. Matters Requiring Consent of MC or the Exchange Members \44\

    The Exchange Constitution will prohibit the Exchange, without MC's consent, from (i) selling, issuing, transferring or otherwise disposing of any limited liability company interest or other equity security of the Exchange or any notes or debt securities of the Exchange containing equity features, (ii) issuing any new trading privileges or material new rights to holders of existing privileges, or (iii) issuing additional memberships. \45\ Any consent of MC requested by the Exchange to take such actions will only be granted by MC upon the affirmative vote of a majority of the regular memberships and the options principal memberships (voted as a single class) at a meeting duly called and convened and at which a quorum is present.\46\ In addition, without the affirmative vote of a majority of regular and options principal members, neither MC nor any affiliate of MC, including MC Acquisition Sub, may sell, issue, transfer or otherwise dispose of any equity security of the Exchange or any notes or debt securities of the Exchange containing equity features.\47\
    \44\ See Article II, Section 8, Article IV, Section 1(j), and Article XIII, Section 1 of the Exchange Constitution and Sections 7, 8 and 9 of the MC Certificate of Incorporation.
    \45\ See Article II, Section 8 and Article IV, Section 1(j) of the Exchange Constitution.
    \46\ See Sections 7(a) and 9 of the MC Certificate of
    Incorporation. Upon receiving a written request from the Exchange for an amendment to the MC Certificate of Incorporation to authorize the issuance of additional memberships of any class, the Secretary of MC shall call a meeting of the holders of memberships entitled to vote thereat to vote on such request in accordance with the MC Bylaws. Such an amendment may be authorized, and such additional memberships may be issued, only upon the affirmative vote of a majority of the regular memberships and the options principal memberships voted (as a single class) at a duly convened meeting. \47\ See Section 7(b) of the MC Certificate of Incorporation. Under the proposal, unless otherwise required by statute, by the MC Certificate of Incorporation, or by the MC Bylaws, all matters submitted to a vote of the MC members shall be decided by the vote of a majority of the Members entitled to vote and present in person or by proxy at the meeting. See Sections 1.10 and 1.11 of the MC Bylaws.

    The Exchange Constitution will also provide that certain of its provisions may not be amended without the consent of the Board of Directors of MC. The provisions requiring consent from the board of MC to amend are:

  • Article II, Section 1 (Classification of the Exchange Board of Governors);
  • Article II, Section 6 (Standing Committees);
  • Article III (Nomination and Election Procedures);
  • Article XIII, Sections 1 and 3 (Procedure, Adoption of Amendments Requiring the Consent of MC); and
  • Any amendment to the Constitution that would result in a material change in the market structure or operations of the Exchange.

    Other than the provisions above, the provisions of the Exchange Constitution may be amended or repealed, and new provisions may be adopted, only if approved by a majority of Governors then in office in accordance with the procedure as specified in Article XIII of the Exchange Constitution.

    E. Amex Adjudicatory Council

    The Amex Adjudicatory Council has the authority to act for the Board of Governors with respect to any appeal or review of a disciplinary hearing, a statutory disqualification proceeding, or a membership proceeding; any review of a written stipulation of facts and consent to penalty; the exercise of any exemptive authority; and such other proceedings or actions authorized by the rules of the Exchange.\48\ The Amex Adjudicatory Council shall consist of six individuals, three of whom shall be Industry Governors (``Industry Council Members''), and three of whom shall be Independent Governors (``Independent Council Members'').\49\ All Council Members shall be nominated and elected in accordance with the procedures as described in Section II.C.1 (``Board of Governors'') above.
    \48\ See Article II, Section 7(a) of the Exchange Constitution. The Amex Board of Governors has a discretionary right of review over matters within the purview of the Amex Adjudicatory Council. \49\ See Article II, Section 7(b) of the Exchange Constitution. Under the current Exchange Constitution, the Amex Adjudicatory Council consists of three floor governors (who spend a substantial part of their time on the floor of the Exchange) and three public governors (who are the representatives of the public (i) none of whom is, or is affiliated with, a broker or dealer in securities and (ii) all of them are nominated by the NASD Nominating Committee).

    In the event that a Council Member is precluded from participating in the Council's consideration of a particular matter due to a conflict of interest, the Board of Governors shall appoint a Governor within the same classification for the position to serve as a substitute for such Council Member with respect to the particular matter. In the event that a Governor fitting the relevant classification is not available to serve as a substitute, the Board of Governors may appoint a person who would be qualified to serve as a Governor within such classification (Industry Governor or Independent Governor). If a position on the Amex Adjudicatory Council becomes vacant, whether because of
    [[Page 78492]]
    death, disability, disqualification, removal or resignation, the Board of Governors shall appoint a Governor within the same classification (Industry or Independent Council Member) to fill the vacancy until the next annual election of such Council members.\50\
    \50\ Under the current Exchange Constitution, the Board of Directors of MC was authorized to fill such vacancies.
    F. Amendments to the Exchange Constitution and the Exchange LLC Agreement

    The Amex Board would continue to be permitted to amend provisions of the Exchange Constitution by the affirmative vote of a majority of the entire Board, although, as noted above, the consent of MC's Board of Directors is needed to amend certain specified provisions of the Exchange Constitution.\51\
    \51\ See Exchange Constitution Article XIII, Section 1.

    Any amendment to or repeal of any provision of the LLC Agreement shall not be effective until the same is filed with or filed with and approved by the Commission, under Section 19 of the Act \52\ and the rules promulgated thereunder, as the case may be.\53\
    \52\ 15 U.S.C. 78s.
    \53\ See Section 11.3 of the LLC Agreement.

    G. Amex Ownership and Control

    Any sale, issuance, transfer or other disposition in any single transaction or series of transactions of (A) any limited liability company interests or other equity security of the Exchange or any securities convertible into or exchangeable for, or options rights or warrants to acquire, any such equity securities or (B) any notes or debt securities containing equity features (including, without limitation, any notes or debt securities convertible into or exchangeable for any equity securities or containing profit participation features) shall: (i) Be made only in compliance with Sections 7(a) and 7(b) of the MC Certificate of Incorporation; \54\ and (ii) be subject to prior approval by the Commission pursuant to the rule filing procedure under Section 19 of the Act,\55\ and the rules promulgated thereunder.\56\ Any attempt to issue or transfer any such equity interests or any rights thereunder in violation of these provisions shall be null and void ab initio.\57\
    \54\ Section 7(a) of the MC Certificate of Incorporation requires that the Exchange obtain the consent of MC in order to effect such sale, issuance, transfer or other disposition. MC, in turn, must obtain the approval of the regular and options principal members to grant such consent. Specifically, a majority of the regular and options principal members must approve any such sale, issuance, transfer of other disposition (voting as a single class). Section 7(b) of the MC Certificate of Incorporation provides that MC will be required to obtain the consent of the majority of the memberships entitled to vote in order for MC or an affiliate to transfer, sell or otherwise dispose of its or the affiliate's interest in the Exchange. If a proposed sale, issuance, transfer or other disposition of interest in the Exchange is not approved at the duly convened meeting convened with respect thereto, the request for such matter shall not be submitted again to the membership for a period of ninety days. See Sections 7(a) and 7(b) of the MC Certificate of Incorporation.
    \55\ 15 U.S.C. 78s.
    \56\ See Section 9.3 of the LLC Agreement.

    \57\ Id.

    In addition, any sale, issuance, transfer or other disposition in any single transaction or series of transactions of (A) any equity securities of MC or MC Acquisition Sub, or any securities convertible into or exchangeable for, or options rights or warrants to acquire, any such equity securities, or (B) any notes or debt securities containing equity features (including, without limitation, any notes or debt securities convertible into or exchangeable for any equity securities or containing profit participation features) shall be subject to prior approval by the Commission pursuant to the rule filing procedure under Section 19 of the Act \58\ and the rules promulgated thereunder; provided that the foregoing shall not apply to any sale, transfer or other disposition of seats or membership interests of the MC.\59\ Any attempt to issue or transfer such equity interest or any rights thereunder in violation of these requirements shall be null and void ab initio.\60\
    \58\ 15 U.S.C. 78s.
    \59\ See Section 7(c) of the MC Certificate of Incorporation. \60\ Id.

    H. Corporate Governance and Structure of MC

    As detailed above, after the closing of the Transaction, MC will own 100% of the equity interests in the Exchange, and MC will continue to be a membership organization of which the members are the regular and options principal members of Amex. The MC Board of Directors will be elected by the members of MC and will consist of five persons who do not necessarily serve on the Exchange Board of Governors.\61\ \61\ Under the MC Certificate of Incorporation, the purposes of MC continue to be: (i) Directly or indirectly holding, acquiring, exchanging, or disposing of equity or other interests in the Exchange and exercising the rights incident to its ownership; and (ii) to conduct and carry on only activities incidental to and in furtherance of the foregoing which may lawfully be conducted and carried on by a corporation of its type formed under the New York NotforProfit Corporation Law. See Section 3 of the MC Certificate of Incorporation.

    1. Board of Directors

    The MC Board of Directors will consist of five directors elected by the members of MC in accordance with the MC Bylaws. The MC Board of Directors will be elected for oneyear terms and will hold office until their successors are elected. No director of MC who has served eight consecutive elected terms as a director will be eligible for election as a director of MC except after an interval of two years; provided, however, that service on the Board of Directors prior to January 1, 1999 will not be taken into account for these purposes.\62\ Unless otherwise required, each matter shall be decided by a vote of a majority of the directors present at the time of the vote, provided a quorum is present.\63\ Vacancies on the MC Board of Directors may be filled for the remaining term of such vacant position by a majority vote of all remaining MC directors.\64\ The MC Bylaws will also provide limitation of liability and indemnification for MC directors and officers.\65\
    \62\ See Section 2.03 of the MC Bylaws.
    \63\ See Section 2.13 of the MC Bylaws.
    \64\ See Section 2.06 of the MC Bylaws.

    \65\ See Article VIII of the MC Bylaws.

    Under the MC Bylaws, all nominees for election as directors \66\ will be selected by either (i) the MC Nominating Committee or (ii) by petition of the members of MC to the MC Nominating Committee.\67\ The process is as follows:
    \66\ The MC Bylaws also includes the nomination procedures for Exchange Governors, Council Members, and Trustees of the Exchange, as described above in Section II.C.1 (``Board of Governors''). \67\ See Sections 1.13 of the MC Bylaws. Any person nominated by the MC Nominating Committee or by petition, whether or not such person is a Member, may be eligible to be elected to the MC Board of Directors.

    The members of MC may propose nominees for directors of MC for consideration by the MC Nominating Committee by written submission filed with the Secretary of MC for delivery to the MC Nominating Committee not less than 12 weeks prior to the annual meeting of the members of MC. The eligibility of any candidate proposed in any such submission will be determined by the MC Nominating Committee in its sole discretion and without the right of appeal.

    The MC Nominating Committee then will report to MC at least eight weeks prior to the date of the annual meeting of the members the names of candidates nominated by it as directors. Such report will be promptly disseminated or made available to members of MC by posting or other appropriate means and will be promptly forwarded to the [[Page 78493]]
    Secretary of MC for mailing to the members in accordance with the MC Bylaws.

    The members of MC also may nominate candidates for directors of MC by written petition filed with the Secretary of MC for delivery to the MC Nominating Committee within three weeks after the dissemination of the report of the MC Nominating Committee. The eligibility of any candidate nominated in any such petition will be determined by the MC Nominating Committee. A statement of the candidates nominated by petition will be promptly disseminated or made available to members of MC by posting or other appropriate means and will be promptly forwarded to the Secretary of MC for mailing to the members within three days after the dissemination in accordance with the MC Bylaws.\68\ \68\ The time periods set forth above may be equitably adjusted by the MC Nominating Committee with respect to the first election of directors occurring following Apri1 1, 2004, to facilitate a prompt initial election; provided, however, in no event shall the petition period described in the proceeding paragraph be less than 10 business days. See Section 1.13(g) of the MC Bylaws.

    2. MC Nominating Committee

    Under the MC Bylaws, the MC Nominating Committee will be appointed by the MC Board of Directors and will consist of two or three directors.\69\ Any vacancy in the MC Nominating Committee will be filled by the Committee's remaining members, who will elect a person qualified to fill the vacancy.\70\
    \69\ See Section 3.03(a) of the MC Bylaws.

    \70\ See Section 3.03(b) of the MC Bylaws.

    The MC Nominating Committee will: (i) Establish criteria and procedures for the nomination of MC directors; (ii) search for qualified nominees for submission to the members of MC for election; (iii) review the qualifications of and, when necessary and appropriate, interview candidates who may be proposed, or who are nominated by petition, as MC directors; (iv) submit to the members of MC a slate of nominees for the election of MC directors; (v) perform any and all other duties in connection with the selection, election, or termination of the MC directors as the MC Board of Directors may request; and (vi) make periodic reports to the entire Board of Directors on such matters within the Committee's powers and responsibilities as the Board of Directors may specify.\71\
    \71\ See Section 3.03(a) of the MC Bylaws.

    I. Confidential Information and Books and Records

    All books and records of the Exchange shall be kept in the United States.\72\ All confidential information of the Exchange pertaining to the selfregulatory function of the Exchange, including all books and records of the Exchange reflecting such confidential information (including but not limited to regulatory investigations, examinations, disciplinary matters, and to the extent designated by the Exchange as confidential, trading data and trading practices) will be retained in confidence by each Governor, the Exchange and its personnel, and will not be used by each Governor, the Exchange and its personnel for any nonregulatory purposes and shall not be made available to any person (including, without limitation, any members of the Exchange) except that such confidential information may be disclosed: (i) To those personnel of the Exchange and to members of the Board of Governors of the Exchange to the extent necessary or appropriate to properly discharge the selfregulatory responsibilities of the Exchange; (ii) to the extent required by applicable statute, rule or regulation or any court of competent jurisdiction; and (iii) to the extent that such confidential information has become generally available publicly through no fault of the Exchange or its Governors, officers, employees or advisors.\73\
    \72\ See Section 2.1 of the LLC Agreement. Likewise, all books and records of MC must be maintained in the United States. See Section 6.02 of the MC Bylaws.
    \73\ See Article II, Section 3 of the Exchange Constitution. In addition, this provision of the Constitution provides that confidential information of the Exchange shall be subject at all times to inspection and copying by the Commission, and that nothing in the Constitution should be interpreted as to limit or impede the rights of the Commission to access and examine such confidential information of the Exchange pursuant to the U.S. federal securities laws and the rules thereunder, or to limit or impede the ability of a Governor, the Exchange and its personnel to disclose such confidential information to the Commission.

    Also, all confidential information of Amex pertaining to the self regulatory function of Amex, including books, minutes and records of Amex reflecting such confidential information (including but not limited to regulatory investigations, examinations, disciplinary matters, and to the extent designated by Amex as confidential, trading data and practices) which shall come into the possession of MC, the officers, directors, employees or agents of MC, shall be retained in confidence by MC and the officers, directors, employees and agents of MC and shall not be used for any nonregulatory purposes.\74\ MC shall take reasonable steps to ensure that its agents will comply with this provision.\75\
    \74\ See Section 16 of the MC Certificate of Incorporation and Section 7.08 of the MC Bylaws. Nothing in the MC Certificate of Incorporation or MC Bylaws shall be interpreted as to limit or impede the rights of the Commission or Exchange to access and examine such confidential information of the Exchange pursuant to the U.S. federal securities laws and the rules thereunder, or to limit or impede the ability of a Governor, the Exchange and its personnel to disclose such confidential information to the Commission.

    \75\ See id.

    MC shall keep at the office of MC or such other locations within the United States as may from time to time be designated by its Board of Directors correct and complete books and records of account and minutes of the proceedings of its members, Board of Directors and committees, if any, and a list of the names, addresses, and classes of membership of the members.\76\ To the extent that the foregoing books, minutes and records are related to the activities of the Exchange, such books, minutes and records shall be deemed to be the books, minutes and records of the Exchange for the purposes of Section 17(b) of the Act,\77\ and shall be subject at all times to inspection and copying by the Commission and the Exchange.\78\
    \76\ See Section 12 of the MC Certificate of Incorporation and Section 6.02 of the MC Bylaws.
    \77\ 15 U.S.C. 78q(b).
    \78\ See Section 12 of the MC Certificate of Incorporation and Section 6.02 of the MC Bylaws.

    J. Commission and Amex Jurisdiction

    For so long as MC shall control, directly or indirectly, the Exchange, MC shall, and its officers, directors and employees by virtue of their acceptance of such position shall be deemed to, irrevocably submit to the exclusive jurisdiction of the United States federal courts, the Commission, and the Exchange, for the purposes of any suit, action or proceeding pursuant to the United States federal securities laws, and the rules or regulations thereunder, arising out of, or relating to the activities of the Exchange, and MC shall, and by virtue of their acceptance of any such position, the officers, directors and employees of MC shall be deemed to, waive and agree not to assert by way of motion, as a defense or otherwise in any such suit, action or proceeding, any claims that it or they are not personally subject to the jurisdiction of the Commission as to such matters, that the suit, action or proceeding is an inconvenient forum or that the venue of the suit, action or proceeding is improper, or that the subject matter [[Page 78494]]
    thereof may not be enforced in or by such courts or agency.\79\ \79\ See Section 14 of the MC Certificate of Incorporation and Section 7.06 of the MC Bylaws.

    With respect to conduct by the officers and directors of MC that relates to the activities of the Exchange, such officers and directors shall be deemed to be the officers and directors of the Exchange solely for the purposes of the removal and censure authority of the Commission pursuant to Section 19(h)(4) of the Act.\80\
    \80\ 15 U.S.C. 78s(h)(4). See Section 13 of the MC Certificate of Incorporation and Section 7.05 of the MC Bylaws.

    K. Cooperation With the Commission

    For so long as MC shall control, directly or indirectly, the Exchange, MC shall, and the officers, directors and employees of MC by virtue of their acceptance of such position shall be deemed to, agree to cooperate with the Commission and the Exchange, in respect of the Commission's oversight responsibilities regarding the Exchange and the selfregulatory functions and responsibilities of the Exchange.\81\ MC shall take reasonable steps to ensure that its agents similarly cooperate with the Commission.\82\
    \81\ See Section 15 of the MC Certificate of Incorporation and Section 7.07 of the MC Bylaws.
    \82\ See id.
    L. Additional Responsibilities of MC Officers and Directors

    For so long as MC shall control, directly or indirectly, the Exchange, each officer, director and employee of MC shall give due regard to the preservation of the independence of the selfregulatory function of the Exchange and to the Exchange's obligations under the Act, and the rules thereunder, including, without limitation, Section 6(b) of the Act,\83\ and shall not take any actions which he or she knows or reasonably should have known would interfere with the effectuation of any decisions by the Exchange Board of Governors relating to its regulatory functions (including disciplinary matters) or which would adversely affect the ability of the Exchange to carry out its responsibilities under the Act.\84\
    \83\ 15 U.S.C. 78f(b).
    \84\ See Section 13 of the MC Certificate of Incorporation and Section 7.05 of the MC Bylaws.

    M. Further Compliance

    MC shall take reasonable steps to ensure that its officers, directors, and employees comply with Sections 12 (Books and Records), 13 (Officers and Directors), 14 (Consent to Jurisdiction), 15 (Cooperation with the Commission) and 16 (Confidential Information) of the MC Certificate of Incorporation, and Sections 6.02 (Books and Records), 7.05 (Officers and Directors), 7.06 (Consent to
    Jurisdiction), 7.07 (Cooperation with the Commission) and 7.08 (Confidential Information) of the MC Bylaws, which shall include obtaining a written agreement from such individuals, as a condition to their initial or continued employment or service as a director, that they will comply with or consent to, as the case may be, such provisions.\85\
    \85\ See Section 17 of the MC Certificate of Incorporation and Section 7.09 of the MC Bylaws.
    N. Amendments to the MC Certificate of Incorporation and MC Bylaws

    Under the MC Certificate of Incorporation and the MC Bylaws, for so long as MC controls, directly or indirectly, the Exchange, before any change or addition to the MC Certificate of Incorporation or MC Bylaws shall be effective, the same shall be submitted to the Exchange Board of Governors, and if the Board shall determine that the same constitutes a ``rule of an exchange'' as such term is defined in the Act and the rules promulgated thereunder,\86\ and must be filed with or filed with and approved by the Commission before the same may be effective, under Section 19 of the Act,\87\ and the rules promulgated thereunder, then the same shall not be effective until filed with or filed with and approved by the Commission, as the case may be.\88\ \86\ See infra note 140.
    \87\ 15 U.S.C. 78s.
    \88\ See Section 18 of the MC Certificate of Incorporation and Section 9.01 of the MC Bylaws.

    O. Limitation on Distributions

    The LLC Agreement will provide that no distribution to MC and MC Acquisition Sub, as participants of the Exchange, shall include revenues received by the Exchange from regulatory fines, fees or penalties.\89\ Amex states that the purpose of this provision is to ensure that the regulatory authority of the Exchange is not used improperly to benefit the holders of the Exchange's LLC interests. \89\ See Section 4.6(c) of the LLC Agreement.

    P. Transparency

    In connection with the Transaction, both the Exchange and MC will adopt resolutions providing for greater transparency of their respective operations. Prior to each annual meeting at which Governors or directors, as the case may be, are elected, the Exchange and MC will distribute a proxy statement disclosing certain matters regarding each of their respective board's activities for the preceding year, pertinent information about the independence of Governors and directors and compensation data for the Governors and five most highly compensated officers of the Exchange.

    Q. Undertakings

    In Amendment No. 6, Amex included certain Undertakings that are applicable to Amex. These Undertakings commit Amex to (1) not terminate Amex's current regulatory services agreement with NASD unless Amex has entered into an alternative arrangement for the provision of regulatory services that has been approved by the Commission, and to use its best efforts to comply with Amex's obligations under the current regulatory services agreement, (2) confer periodically with Commission staff regarding the status of Amex's regulatory program, and (3) submit certain financial information to the Commission.\90\ The purpose of the Undertakings is to further ens