[Federal Register Volume 73, Number 184 (Monday, September 22, 2008)]
[Notices]
[Pages 54646-54648]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-22013]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-58536; File No. 4-566]
Program for Allocation of Regulatory Responsibilities Pursuant to
Rule 17d-2; Order Approving and Declaring Effective a Plan for the
Allocation of Regulatory Responsibilities Among the American Stock
Exchange LLC, Boston Stock Exchange, Inc., CBOE Stock Exchange, LLC,
Chicago Stock Exchange, Inc., Financial Industry Regulatory Authority,
Inc., International Securities Exchange, LLC, The NASDAQ Stock Market
LLC, National Stock Exchange, Inc., New York Stock Exchange, LLC, NYSE
Arca Inc., NYSE Regulation, Inc., and Philadelphia Stock Exchange, Inc.
September 12, 2008.
On August 12, 2008, the American Stock Exchange LLC (``Amex''),
Boston Stock Exchange, Inc. (``BSE''), CBOE Stock Exchange, LLC
(``CBOE''), Chicago Stock Exchange, Inc. (``CHX''), Financial Industry
Regulatory Authority, Inc. (``FINRA''), International Securities
Exchange, LLC (``ISE''), The NASDAQ Stock Market, LLC (``NASDAQ''),
National Stock Exchange, Inc. (``NSX''), New York Stock Exchange LLC
(``NYSE''), NYSE Arca Inc. (``NYSE Arca''), NYSE Regulation, Inc.
(acting under authority delegated to it by NYSE) (``NYSE Regulation''),
and Philadelphia Stock Exchange, Inc. (``Phlx'') (collectively,
``Participating Organizations'' or ``Parties'') filed with the
Securities and Exchange Commission (``Commission''), pursuant to
Section 17(d) of the Securities Exchange Act of 1934 (``Act''),\1\ and
Rule 17d-2 thereunder,\2\ a proposed plan for the allocation of
regulatory responsibilities (``Plan''). The Plan was published for
comment on August 18, 2008.\3\ The Commission received no comments on
the Plan. This order approves and declares effective the Plan.
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\1\ 15 U.S.C. 78q(d).
\2\ 17 CFR 240.17d-2.
\3\ See Securities Exchange Act Release No. 58350 (August 13,
2008), 73 FR 48248 (File No. 4-566) (``Notice'').
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I. Introduction
Section 19(g)(1) of the Act,\4\ among other things, requires every
self-regulatory organization (``SRO'') registered as either a national
securities exchange or national securities association to examine for,
and enforce compliance by, its members and persons associated with its
members with the Act, the rules and regulations thereunder, and the
SRO's own rules, unless the SRO is relieved of this responsibility
pursuant to Section 17(d) \5\ or Section 19(g)(2) \6\ of the Act.
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\4\ 15 U.S.C. 78s(g)(1).
\5\ 15 U.S.C. 78q(d).
\6\ 15 U.S.C. 78s(g)(2).
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Section 17(d)(1) of the Act \7\ was intended, in part, to eliminate
unnecessary multiple examinations and regulatory duplication for those
broker-dealers that maintain memberships in more than one SRO (``common
members'').\8\ With respect to a common member, Section 17(d)(1)
authorizes the Commission, by rule or order, to relieve an SRO of the
responsibility to receive regulatory reports, to examine for and
enforce compliance with applicable statutes, rules, and regulations, or
to
[[Page 54647]]
perform other specified regulatory functions.
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\7\ 15 U.S.C. 78q(d)(1).
\8\ See Securities Act Amendments of 1975, Report of the Senate
Committee on Banking, Housing, and Urban Affairs to Accompany S.
249, S. Rep. No. 94-75, 94th Cong., 1st Session 32 (1975).
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To implement Section 17(d)(1), the Commission adopted two rules:
Rule 17d-1 and Rule 17d-2 under the Act.\9\ Rule 17d-1 authorizes the
Commission to name a single SRO as the designated examining authority
(``DEA'') to examine common members for compliance with the financial
responsibility requirements imposed by the Act, or by Commission or SRO
rules.\10\ When an SRO has been named as a common member's DEA, all
other SROs to which the common member belongs are relieved of the
responsibility to examine the firm for compliance with the applicable
financial responsibility rules. On its face, Rule 17d-1 deals only with
an SRO's obligations to enforce broker dealers' compliance with
financial responsibility requirements. Rule 17d-1 does not relieve an
SRO from its obligation to examine a common member for compliance with
its own rules and provisions of the federal securities laws governing
matters other than financial responsibility, including sales practices
and trading activities and practices.
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\9\ 17 CFR 240.17d-1 and 17 CFR 240.17d-2, respectively.
\10\ See Securities Exchange Act Release No. 12352 (April 20,
1976), 41 FR 18808 (May 7, 1976).
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To address regulatory duplication in these and other areas, the
Commission adopted Rule 17d-2 under the Act.\11\ Rule 17d-2 permits
SROs to propose joint plans for the allocation of regulatory
responsibilities with respect to their common members. Under paragraph
(c) of Rule 17d-2, the Commission may declare such a plan effective if,
after providing for notice and comment, it determines that the plan is
necessary or appropriate in the public interest and for the protection
of investors, to foster cooperation and coordination among the SROs, to
remove impediments to, and foster the development of, a national market
system and a national clearance and settlement system, and is in
conformity with the factors set forth in Section 17(d) of the Act.
Commission approval of a plan filed pursuant to Rule 17d-2 relieves an
SRO of those regulatory responsibilities allocated by the plan to
another SRO.
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\11\ See Securities Exchange Act Release No. 12935 (October 28,
1976), 41 FR 49091 (November 8, 1976).
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II. The Plan
The proposed Plan is designed to eliminate regulatory duplication
by allocating regulatory responsibility over Common NYSE Members \12\
or Common FINRA Members,\13\ as applicable, (collectively, ``Common
Members'') for the surveillance, investigation, and enforcement of
common insider trading rules (``Common Rules'').\14\ The Plan assigns
regulatory responsibility over Common NYSE Members to NYSE Regulation
for surveillance, investigation, and enforcement of insider trading by
broker-dealers, and their associated persons, with respect to NYSE-
listed stocks and NYSE Arca-listed stocks, irrespective of the
marketplace(s) maintained by the Participating Organizations on which
the relevant trading may occur. The Plan assigns regulatory
responsibility over Common FINRA Members to FINRA for surveillance,
investigation, and enforcement of insider trading by broker-dealers,
and their associated persons, with respect to NASDAQ-listed stocks and
Amex-listed stocks, as well as any CHX solely-listed stock,
irrespective of the marketplace(s) maintained by the Participating
Organizations on which the relevant trading may occur. The full text of
the Plan and Exhibits A, B, and C thereto can be found in the Notice.
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\12\ Common NYSE Members include members of the NYSE and at
least one of the Participating Organizations.
\13\ Common FINRA Members are members of FINRA and at least one
of the Participating Organizations.
\14\ Common Rules are defined as: (i) Federal securities laws
and rules promulgated by the Commission pertaining to insider
trading, and (ii) the rules of the Participating Organizations that
are related to insider trading. See Exhibit A to the Plan.
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In addition to the Plan, the Participating Organizations have
entered into two regulatory services agreements that address
investigation and enforcement in situations that involve trading in
equity securities by non-Common Members, as Rule 17d-2 covers only
situations involving Common Members. The first agreement is between
NYSE Regulation (acting as the regulatory services provider), FINRA,
and each of the exchanges (``NYSE Regulation Agreement''). The second
agreement is between FINRA (acting as the regulatory services
provider), NYSE Regulation, and each of the exchanges (``FINRA
Agreement''). The agreements provide for the investigation and
enforcement of suspected insider trading against broker-dealers and
their associated persons that (i) are not Common Members of NYSE in the
case of insider trading in NYSE-listed stocks and NYSE-Arca listed
stocks; or (ii) are not Common Members of FINRA in the case of insider
trading in NASDAQ-listed stocks, Amex-listed stocks, and any CHX
solely-listed stock.
Under the agreements, NYSE Regulation and FINRA, respectively, will
provide to the exchanges ``Core Services'' related and limited to the
investigation and enforcement activities for non-Common Members where
these activities relate to insider trading of equity securities listed
on the NYSE or NYSE Arca in the case of the NYSE Regulation Agreement,
and to the insider trading of equity securities listed on the Nasdaq or
Amex, and any CHX solely-listed security in the case of the FINRA
Agreement. The Core Services provided under the agreements are rendered
(a) only upon completion of a surveillance review under the 17d-2 Plan,
and (b) at the request of the relevant exchange. Pursuant to the Plan,
NYSE Regulation and FINRA will conduct surveillance, investigation, and
enforcement for insider trading for Common NYSE Members and Common
FINRA Members, respectively. Surveillance for non-Common Members is
excluded from the Plan and remains the responsibility of the SROs in
which such non-Common Members maintain membership. However, due to the
nature of insider trading surveillance technology and processes, the
surveillance conducted by NYSE Regulation and FINRA will encompass non-
Common Members as the surveillance function does not differentiate
between Common and non-Common Members. Accordingly, the investigation
and enforcement services performed under the agreements will arise from
surveillance undertaken by NYSE Regulation and FINRA.
III. Discussion
The Commission finds that the proposed Plan is consistent with the
factors set forth in Section 17(d) of the Act \15\ and Rule 17d-2
thereunder \16\ in that the proposed Plan is necessary or appropriate
in the public interest and for the protection of investors, fosters
cooperation and coordination among SROs, and removes impediments to and
fosters the development of the national market system. In particular,
the Commission believes that the proposed Plan should reduce
unnecessary regulatory duplication by allocating regulatory
responsibility for the surveillance, investigation, and enforcement of
Common Rules over Common NYSE Members, with respect to NYSE-listed
stocks and NYSE Arca-listed stocks, to NYSE and over Common FINRA
Members, with respect to NASDAQ-listed stocks, Amex-listed stocks, and
any CHX solely-listed stock,
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to FINRA. Accordingly, the proposed Plan promotes efficiency by
consolidating these regulatory functions in a single SRO based on the
listing market for a stock, with regard to Common NYSE Members and
Common FINRA Members.
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\15\ 15 U.S.C. 78q(d).
\16\ 17 CFR 240.17d-2.
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In addition, the Commission notes that the Plan provides that the
costs for insider trading surveillance would be shared among the
Participating Organizations based on their relative trade volume,
subject to certain minimum payment amounts for smaller markets.
Modifications to the fees assessed the Participating Organizations
pursuant to the cost allocation methodologies established in the Plan
do not require an amendment to the Plan; however, any modifications to
the cost allocation methodologies would require approval by the
Commission. The Commission believes that the Plan provides a reasonable
method to allocate among the Parties expenses reasonably incurred by
the SRO having regulatory responsibilities under the Plan.\17\
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\17\ 17 CFR 240.17d-2(b).
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The Commission also notes that because under Rule 17d-2 regulatory
responsibility may be allocated from one SRO to another SRO only for
Common Members, the Participating Organizations have entered into two
regulatory services agreements with NYSE Regulation and FINRA,
respectively, to address investigation and enforcement of suspected
insider trading involving members who are neither Common NYSE Members
nor Common FINRA Members.\18\ The Commission is neither approving nor
disapproving the terms of the regulatory services agreements. However,
the Commission does note that under these regulatory services
agreements the ultimate responsibility and primary liability for self-
regulatory obligations would remain with each exchange and association,
rather than the SRO retained to perform such functions.
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\18\ Members only of the NYSE would be the responsibility of
NYSE; members only of FINRA would be the responsibility of FINRA.
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IV. Conclusion
This Order gives effect to the Plan filed with the Commission in
File No. 4-566. The Parties shall notify all members affected by the
Plan of their rights and obligations under the Plan.
It is therefore ordered, pursuant to Section 17(d) of the Act,\19\
that the Plan in File No. 4-566 by and among Amex, BSE, CBOE, CHX,
FINRA, ISE, NASDAQ, NSX, NYSE, NYSE Arca, NYSE Regulation, and Phlx
filed pursuant to Rule 17d-2 is hereby approved and declared effective.
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\19\ 15 U.S.C. 78q(d).
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It is further ordered that the Participating Organizations are
relieved of those regulatory responsibilities allocated to NYSE and
FINRA under the Plan in File No. 4-566.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\20\
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\20\ 17 CFR 200.30-3(a)(34).
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Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-22013 Filed 9-19-08; 8:45 am]
BILLING CODE 8010-01-P