SEC Approves Rule Changes For NYSE-Archipelago Merger

by Glen Shapiro, LawAndTax-News.com, New York

01 March 2006

The US Securities and Exchange Commission on Monday approved rule changes by the New York Stock Exchange, Inc. and the Pacific Exchange, Inc. to effect the proposed merger of the NYSE and Archipelago Holdings, Inc., the owner of the Pacific Exchange.

Subject to the consummation of the business combination, under the rule changes approved this week NYSE and Archipelago Holdings will be wholly-owned subsidiaries of a newly-formed, publicly-traded holding company, NYSE Group, Inc.

The NYSE’s current business and assets will be held in three separate entities affiliated with NYSE Group – New York Stock Exchange LLC, NYSE Market and NYSE Regulation, Inc.

NYSE LLC will be a direct, wholly-owned subsidiary of NYSE Group and will succeed to NYSE’s registration as a national securities exchange. NYSE LLC will delegate the performance of its market and self-regulatory functions to two wholly-owned subsidiaries, NYSE Market and NYSE Regulation.

NYSE Market will operate the exchange trading market and will issue trading licenses to market participants to trade on the exchange. NYSE Market’s board will consist of NYSE Group’s CEO and a majority of the independent directors of NYSE Group. In addition, at least 20% (and not less than two) directors will not be members of the NYSE Group board.

NYSE Regulation, a not-for-profit corporation, will perform the regulatory functions of NYSE LLC. The NYSE Regulation CEO will report directly to the NYSE Regulation board, a majority of which will be independent directors that are not NYSE Group directors. Also on the NYSE Regulation board will be the NYSE Regulation CEO and NYSE Group independent directors.

This structure differs substantially from the NYSE’s current regulatory structure, in which the NYSE’s regulatory function is housed in the same entity as its market and the Exchange’s chief regulatory officer reports to the NYSE board’s regulatory oversight committee. NYSE Regulation will also perform many of the Pacific Exchange’s regulatory functions pursuant to a regulatory services agreement.

The NYSE’s final proposal reflects a number of suggestions by the Commission to further enhance the independence of NYSE Regulation and better secure the adequate funding of the Exchange’s regulatory program.

SEC Chairman Christopher Cox observed that:

“The evolution of our major exchanges into for-profit, publicly-traded companies that compete on a global basis will require increasingly vigorous and vigilant regulation."

"The Commission has worked with the NYSE and the Pacific Exchange to adopt changes in the proposed regulatory structure for the combined entity that will increase the independence of regulation and oversight. The Commission intends to closely monitor the NYSE’s and Pacific Exchange’s performance under the new structure, and will undoubtedly recommend appropriate changes to this structure as warranted by experience."

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