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Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing of Proposed Rule Change to Amend NYSE Arca Rules 3.1 and 3.3 and Section 4.01(a) of the Exchange’s Bylaws to Establish a Regulatory Oversight Committee as a Committee of the Board of Directors of the Exchange

In its filing with the Commission, the self-regulatory organization included statements concerning the purpose of, and basis for, the proposed rule change and discussed any comments it received on the proposed rule change. The text of those statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant parts of such statements.
A. Self-Regulatory Organization’s Statement of the Purpose of, and the Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to establish a ROC as a committee of the Board with the responsibility to independently monitor the Exchange’s regulatory operations.
[3]

To effectuate this change, the Exchange proposes to amend NYSE Arca Rules 3.1 and 3.3 and Section 4.01(a) of the Bylaws of the Exchange.

Rule 3.1(a) provides the Board with authority to establish one or more committees consisting of one or more directors of the Exchange (each, a “Board Committee”). Rule 3.3 specifies existing Board Committees. The Exchange proposes to amend Rule 3.3 to provide for a ROC and delineate its composition and functions. The proposed new rule text would be substantially similar to Article III, section 5(c) of the By-Laws of the NASDAQ Stock Market LLC (“Committees Composed Solely of Directors”)
[4]

and Article V, section 6(c) of the Third Amended and Restated Bylaws of BATS Exchange, Inc. (“BATS”) (“BATS Bylaws”).
[5]

In particular, proposed Rule 3.3(a)(2)(A) would provide that the Board shall appoint a ROC on an annual basis. Proposed Rule 3.3(a)(2)(B) would describe the composition of the ROC. The Exchange proposes that the ROC would consist of at least three members, each of whom would be a public director of the Exchange or a director of NYSE Regulation who satisfies the public director requirements set forth in section 3.02(a) of the Bylaws of the Exchange.
[6]

The Exchange believes that the requirement for ROC members to be public directors ensures the independence of these members. The Exchange further believes that a ROC comprised of at least three members is appropriate. The size and composition of the proposed ROC would be largely the same as that of the ROCs of other self-regulatory organizations (“SROs”),
[7]


with the exception of the possibility to include directors of NYSE Regulation who meet the public director requirements.
[8]

A ROC with at least three members satisfying the exchange’s independence requirements has been recognized as one of several measures that can help ensure the independence of the regulatory function from the market operations and commercial interests of a national securities exchange.
[9]

Further, proposed Rule 3.3(a)(2)(B) would provide that the Board may, on affirmative vote of a majority of directors, at any time remove any member of the ROC for cause. Proposed Rule 3.3(a)(2)(B) would also provide that a failure of the member to qualify as a public director shall constitute a basis to remove a member of the ROC for cause. Similar authority is found in the bylaws governing the ROCs of other SROs.
[10]

Finally, proposed Rule 3.3(a)(2)(B) would provide that, if the term of office of a ROC committee member terminates under this section, and the remaining term of office of such committee member at the time of termination is not more than three months, during the period of vacancy the ROC would not be deemed to be in violation of its compositional requirements by virtue of the vacancy. Once again, this is consistent with the rules and bylaws of other SROs.
[11]

Proposed Rule 3.3(a)(2)(C) would describe the functions and authority of the proposed ROC. The proposed ROC’s responsibilities would be to:
Oversee the Exchange’s regulatory and self-regulatory organization responsibilities and evaluate the adequacy and effectiveness of the Exchange’s regulatory and self-regulatory organization responsibilities;
assess the Exchange’s regulatory performance; and
advise and make recommendations to the Board or other committees of the Board about the Exchange’s regulatory compliance, effectiveness and plans.
[12]

In furtherance of these functions, the proposed rule would provide the ROC with the authority and obligation to review the regulatory budget of the Exchange and specifically inquire into the adequacy of resources available in the budget for regulatory activities. Moreover, under the proposed rule, the ROC would be charged with meeting regularly with the Chief Regulatory Officer (“CRO”) in executive session and, in consultation with the Exchange’s Chief Executive Officer, establishing the goals, assessing the performance, and recommending the CRO’s compensation. Finally, under the proposed rule, the ROC would be responsible for keeping the Board informed with respect to the foregoing matters.
[13]

Finally, the Exchange proposes to amend Article IV, section 4.01 of its Bylaws governing board committees. Specifically, the Exchange proposes to add references to the proposed ROC to subsection (a) of Section 4.01. Further, the Exchange proposes to add “Except as otherwise provided in the Rules” to the clause in section 4.01(a) that requires each board committee to be comprised of at least 50% public directors because, under the proposed changes to Rules 3.1 and 3.3, the ROC may include directors of NYSE Regulation. Lastly, the Exchange proposes to add text to section 4.01(a) providing that vacancies in the membership of any committee would be filled by the Exchange Board, which is consistent with proposed Rule 3.3 and the same as other SROs.
[14]

As stated above, the Exchange proposes that members of the ROC could be either public directors of the Exchange Board or directors of NYSE Regulation who satisfy the public director requirements, thereby ensuring that the ROC would be comprised of independent members.
[15]

The proposed eligibility of qualifying directors of the NYSE Regulation board for the ROC would allow individuals to be members of the ROC who have direct experience in overseeing the adequacy and effectiveness of the Exchange’s and its affiliates’ regulatory programs.

The Exchange believes that the proposed rule change creating an independent board committee to oversee the adequacy and effectiveness of the performance of its self-regulatory responsibilities is consistent with previously approved rule changes for other self-regulatory organizations and would enable the Exchange to harmonize its corporate governance with that of its industry peers.
[16]

Moreover, the Exchange believes that the proposed adoption of a ROC would ensure the continued independence of the regulatory process.
[17]

The fundamental hallmarks of regulatory independence—determinations regarding the Exchange’s regulatory plan, programs, budget and staffing made by individuals independent of Exchange management and a CRO having general supervision of the regulatory operations of the Exchange and reporting to a ROC—are integral to the proposal.
[18]

2. Statutory Basis
The Exchange believes that the proposed rule change is consistent with section 6(b) of the Exchange Act
[19]

in general, and with section 6(b)(1)
[20]

in particular, in that it enables the Exchange to be so organized as to have the capacity to be able to carry out the purposes of the Exchange Act and to comply, and to enforce compliance by its exchange members and persons associated with its exchange members, with the provisions of the Exchange Act, the rules and regulations thereunder, and the rules of the Exchange.

The proposed change would create an independent board committee to oversee the adequacy and effectiveness of the performance of the Exchange’s self-regulatory responsibilities. The proposed ROC, similar in composition and functions to the approved ROCs of other SROs, would be designed to oversee the Exchange’s regulatory and self-regulatory organization responsibilities and evaluate the adequacy and effectiveness of the Exchange’s regulatory and self-regulatory organization responsibilities; assess the Exchange’s regulatory performance; and advise and make recommendations to the Board or other committees of the Board about the Exchange’s regulatory compliance, effectiveness and plans.
As noted, the Exchange proposes that members of the ROC could be either public directors of the Exchange Board or directors of NYSE Regulation who satisfy the public director requirements, thereby ensuring that the ROC would be comprised of independent members. The Exchange believes that proposing to allow directors of NYSE Regulation who satisfy the public director requirements to be eligible for the ROC would provide the choice to include these individuals who have direct experience in overseeing the adequacy and effectiveness of the Exchange’s and its affiliates’ regulatory programs. Accordingly, the Exchange believes that the proposed amendment would contribute to the orderly operation of the Exchange and would enable the Exchange to be so organized as to have the capacity to carry out the purposes of the Exchange Act and comply and enforce compliance by its members and persons associated with its members with the provisions of the Exchange Act. The Exchange therefore believes that approval of the proposed amendment to the Bylaws is consistent with section 6(b)(1).
The Exchange also believes that this filing furthers the objectives of section 6(b)(5) of the Exchange Act
[21]

because the proposed rule change would be consistent with and facilitate a governance and regulatory structure that is designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in securities, to remove impediments to, and perfect the mechanism of a free and open market and a national market system and, in general, to protect investors and the public interest.

As discussed above, the Exchange believes that the proposed creation of a ROC composed of public directors of the Exchange Board or directors of NYSE Regulation who satisfy the public director requirements would align the Exchange’s corporate governance practices with other SROs that have adopted a ROC to monitor the adequacy and effectiveness of the regulatory program, assess regulatory performance, and assist the Board in reviewing the regulatory plan and the overall effectiveness of the regulatory function. Moreover, the Exchange believes that the proposed ROC structure would also sufficiently “insulate” the regulatory functions from the Exchange’s “market and other commercial interests” in order for the Exchange to carry out its regulatory obligations.
[22]

The Exchange believes that the proposed rule change is therefore consistent with and facilitates a governance and regulatory structure that furthers the objectives of section 6(b)(5) of the Exchange Act. The independent oversight of the Exchange’s regulatory functions by the proposed ROC is also designed to protect investors as well as the public interest.

B. Self-Regulatory Organization’s Statement on Burden on Competition

The Exchange does not believe that the proposed rule change would impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Exchange Act. The proposed rule change is not intended to address competitive issues but rather is concerned solely with the administration and functioning of the Exchange’s Board.

C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others
No written comments were solicited or received with respect to the proposed rule change.


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