Document ID: SEC-2006-0754-0001
Agency: sec
Document Type: Notice
Title: Joint industry plan: American Stock Exchange LLC, et al.
Posted Date: 2006-06-14T04:00Z

[Federal Register: June 14, 2006 (Volume 71, Number 114)]
[Notices]               
[Page 34399-34401]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr14jn06-136]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53940; File No. 4-516]

 
Joint Industry Plan; Order Approving Options Regulatory 
Surveillance Authority Plan by the American Stock Exchange LLC, Boston 
Stock Exchange, Inc., Chicago Board Options Exchange, Incorporated, 
International Securities Exchange, Inc., Pacific Exchange, Inc. (n/k/a 
NYSE Arca, Inc.) and Philadelphia Stock Exchange, Inc.

June 5, 2006.

I. Introduction

    On January 31, 2006, pursuant to Rule 608 under the Securities 
Exchange Act of 1934 (``Act''),\1\ the American Stock Exchange LLC, 
Boston Stock Exchange, Inc., Chicago Board Options Exchange, 
Incorporated (``CBOE''), International Securities Exchange, Inc., 
Pacific Exchange, Inc. (n/k/a NYSE Arca, Inc.) \2\ and Philadelphia 
Stock Exchange, Inc. (collectively, ``Exchanges'') filed with the 
Securities and Exchange Commission (``Commission'') the Options 
Regulatory Surveillance Authority Plan, a plan providing for the joint 
surveillance, investigation and detection of insider trading on the 
markets maintained by the Exchanges (``ORSA Plan'').\3\
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    \1\ 17 CFR 242.608
    \2\ On March 6, 2006, the Pacific Exchange, Inc. (``PCX'') filed 
with the Commission a proposed rule change, which was effective upon 
filing, to change the name of PCX, as well as several other related 
entities, to reflect the recent acquisition of PCX Holdings, Inc., 
the parent company of PCX, by Archipelago Holdings, Inc. 
(``Archipelago'') and the merger of the New York Stock Exchange, 
Inc. with Archipelago. See File No. SR-PCX-2006-24. All references 
herein have been changed to reflect these transactions.
    \3\ The Exchanges initially filed the ORSA Plan with the 
Commission on May 5, 2005. The Exchanges filed revised versions of 
the ORSA Plan on July 6, 2005 and September 29, 2005.
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    On April 10, 2006, a detailed summary of the ORSA Plan was 
published for comment in the Federal Register.\4\ The Commission 
received no comments on the ORSA Plan. This Order approves the ORSA 
Plan as proposed pursuant to section 11A of the Act \5\ and Rule 608 
thereunder.\6\
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    \4\ See Securities Exchange Act Release No. 53589 (April 4, 
2006), 71 FR 18120. The full text of the plan was made available to 
interested persons on the Commission's Web site.
    \5\ 15 U.S.C. 78k-1.
    \6\ 17 CFR 242.608
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II. Summary of the ORSA Plan

    The purpose of the ORSA Plan is to permit the Exchanges to act 
jointly in the administration, operation, and maintenance of a 
regulatory system for the surveillance, investigation, and detection of 
the unlawful use of undisclosed, material information in trading on one 
or more of their markets. By sharing the costs of these regulatory 
activities and by sharing the regulatory information generated under 
the ORSA Plan, the Exchanges believe they will be able to enhance the 
effectiveness and efficiency with which they regulate their respective 
markets and the national market system for options. The Exchanges also 
believe that the ORSA Plan will avoid duplication of certain regulatory 
efforts on the part of the Exchanges.

A. Policy Committee

    The ORSA Plan provides for the establishment of a Policy Committee, 
on which each Exchange will have one representative and one vote. The 
Policy Committee is responsible for overseeing the operation of the 
ORSA Plan and for making all policy decisions pertaining to the ORSA 
Plan, including, among other things, the following:
    1. Determining the extent to which regulatory, surveillance, and

[[Page 34400]]

investigative functions will be conducted on behalf of the Exchanges;
    2. Making all determinations pertaining to contracts with (i) 
persons who provide goods and services under the ORSA Plan, including 
parties to the ORSA Plan who provide such goods and services, and (ii) 
parties to the ORSA Plan, and other self-regulatory organizations who 
engage in regulatory, surveillance, or investigative activities under 
the ORSA Plan;
    3. Reviewing and approving surveillance standards and other 
parameters to be used by self-regulatory organizations who perform 
regulatory and surveillance functions under the ORSA Plan; and
    4. Determining budgetary and financial matters.
    All decisions by the Policy Committee, except as otherwise 
indicated, will be by majority vote, subject to any required approval 
of the Commission. Disputes arising in connection with the operation of 
the ORSA Plan will be resolved by the Policy Committee acting by 
majority vote.

B. Delegation of Functions

    The ORSA Plan permits the Exchanges, as and to the extent 
determined by the Policy Committee, to delegate all or part of the 
regulatory and surveillance functions under the ORSA Plan (other than 
the Policy Committee's own functions) to one or more Exchanges or other 
self-regulatory organizations. The Policy Committee has determined to 
delegate the operation of the surveillance and investigative facility 
contemplated by the ORSA Plan to CBOE. The Exchanges have entered into 
a Regulatory Services Agreement (``RSA'') with CBOE, as service 
provider, pursuant to which CBOE will perform certain regulatory and 
surveillance functions under the ORSA Plan and use its automated 
insider trading surveillance system to perform these functions on 
behalf of the Exchanges.
    Although CBOE will be delegated responsibility for these 
activities, the ORSA Plan specifically provides that each Exchange will 
remain responsible for the regulation of its market and for bringing 
enforcement proceedings whenever it appears that persons subject to its 
regulatory jurisdiction may have violated the Exchange's own rules, the 
Act, or the rules of the Commission thereunder.

C. Review of Service Provider

    The Policy Committee must periodically, but not less frequently 
than annually, review the performance of persons to whom regulatory and 
surveillance activities have been delegated under the ORSA Plan. The 
Policy Committee must evaluate whether such activities have been 
performed by the service provider in a reasonably acceptable manner 
consistent with any contract governing the performance of such services 
and whether the costs of such services are reasonable. If the Policy 
Committee determines that the performance of delegated activities is 
not reasonably acceptable or that the costs are unreasonable, the 
Policy Committee may terminate the delegation of activities to such 
persons subject to applicable contractual terms.

D. Potential Insider Trading Violations

    When in the course of performing regulatory and surveillance 
functions the Exchanges acting under the ORSA Plan, or a self-
regulatory organization to whom such functions have been delegated, 
obtain information indicating that there may have been an insider 
trading violation by members or associated persons of one or more of 
the Exchanges, the Exchanges or such delegatee will promptly inform all 
such parties of the relevant facts. The Exchanges acting jointly will 
not have authority to take disciplinary action against members or 
associated persons of any individual Exchange. All such authority will 
remain that of the Exchanges acting in their individual capacities.

E. Other Regulatory or Surveillance Functions

    The ORSA Plan permits the Exchanges to provide for the joint 
performance of any other regulatory or surveillance functions or 
activities that the Exchanges determine to bring within the scope of 
the ORSA Plan, but any determination to expand the functions or 
activities under the ORSA Plan would require an amendment to the ORSA 
Plan subject to Commission approval and the requirements for amendments 
described below.

F. Allocation of Costs

    The costs under the ORSA Plan to be allocated among the Exchanges 
will consist of all costs duly incurred by any Exchange as a direct 
result of its performing regulatory or surveillance functions under the 
ORSA Plan, together with any amounts charged under the ORSA Plan (or 
charged to any Exchange authorized to incur such charges under the ORSA 
Plan) by any other person for goods or services provided under the ORSA 
Plan. The costs incurred by CBOE in developing the insider trading 
surveillance system to be used by CBOE as the ORSA Plan service 
provider will be borne by CBOE without reimbursement. Costs incurred by 
CBOE in maintaining and upgrading its system going forward will be 
allocated among the Exchanges, provided that such costs have been 
authorized by the Exchanges.
    Costs in each calendar quarter will be allocated among the 
Exchanges in accordance with a three element formula: (1) Fifty percent 
of costs will be allocated equally among the Exchanges (with a pro rata 
adjustment for any exchange that was not an Exchange for the entire 
calendar quarter); (ii) twenty-five percent of costs will be allocated 
among the Exchanges in accordance with their respective contract volume 
market shares during the calendar quarter; and (iii) twenty-five 
percent of costs will be allocated among the Exchanges in accordance 
with their respective numbers of classes of securities options traded 
at any time during the calendar quarter.

G. New Parties to the ORSA Plan; Participation Fee

    Any other self-regulatory organization that maintains a market for 
the trading of securities options in accordance with rules approved by 
the Commission may become a party to the ORSA Plan, subject to agreeing 
to the terms and conditions of the ORSA Plan, agreeing to the terms and 
conditions of any contract pursuant to which the parties to the ORSA 
Plan have delegated regulatory and surveillance functions under the 
ORSA Plan, and payment of a participation fee.
    The participation fee will be an amount determined by a majority of 
the Exchanges to be fair and reasonable compensation for the costs 
incurred in developing and maintaining the facilities used under the 
ORSA Plan and in providing for participation by the new party. In 
determining the amount of the participation fee, the Exchanges must 
consider the following factors:
    1. The portion of costs previously paid for the development, 
expansion and maintenance of facilities used under the ORSA Plan which, 
under generally accepted accounting principles, would have been treated 
as capital expenditures and would have been amortized over the five 
years preceding the admission of the new party;
    2. an assessment of costs incurred and to be incurred, if any, to 
accommodate the new party, which are not otherwise required to be paid 
by the new party; and

[[Page 34401]]

    3. previous participation fees paid by other new parties.

If the Exchanges and a new party cannot agree on the amount of the 
participation fee, the matter will be subject to review by the 
Commission.

    A self-regulatory organization that does not maintain a market for 
the trading of securities options may become a party to the ORSA Plan, 
and a self-regulatory organization that ceases to maintain such a 
market may continue to be a party to the ORSA Plan, only if permitted 
by a majority of the other parties.

H. Term and Termination

    The ORSA Plan will remain in effect for so long as there are two or 
more parties to the ORSA Plan. Any Exchange may withdraw from the ORSA 
Plan at any time on not less than six months prior written notice to 
each of the other parties. Any Exchange withdrawing from the ORSA Plan 
will remain liable for its proportionate share of costs allocated to it 
for the period during which it was a party, but it will have no further 
obligations under the ORSA Plan or to any of the other Exchanges with 
respect to the period following the effectiveness of its withdrawal. 
The right of an Exchange to participate in joint regulatory services 
under the ORSA Plan is not transferable without the consent of the 
other Exchanges.

I. Amendments

    The ORSA Plan may be amended by the affirmative vote of all of the 
parties, provided that the provisions pertaining to the allocation of 
costs may be amended by the affirmative vote of not less than two-
thirds of the parties, subject in each case to any required approval of 
the Commission.

III. Discussion

    In section 11A of the Act,\7\ Congress directed the Commission to 
facilitate the development of a national market system consistent with 
the objectives of the Act. In particular, section 11A(a)(3)(B) of the 
Act \8\ authorizes the Commission ``by rule or order, to authorize or 
require self-regulatory organizations to act jointly with respect to 
matters as to which they share authority under this title in planning, 
developing, operating, or regulatory a national market system (or a 
subsystem thereof) or one or more facilities thereof.'' Rule 608 under 
the Act establishes the procedures for filing, amending, and approving 
national market system plans.\9\ Pursuant to paragraph (b)(2) of Rule 
608, the Commission's approval of a national market system plan is 
conditioned upon a finding that the proposed plan ``is necessary or 
appropriate in the public interest, for the protection of investors and 
the maintenance of fair and orderly markets, to remove impediments to, 
and perfect the mechanisms of, a national market system, or otherwise 
in furtherance of the purposes of the Act.'' \10\ After carefully 
considering the ORSA Plan, the Commission finds that the ORSA Plan is 
appropriate in the public interest, for the protection of investors and 
the maintenance of fair and orderly markets, to remove impediments to, 
and perfect the mechanisms of, a national market system, and in 
furtherance of the purposes of the Act. In particular, the Commission 
finds that the ORSA Plan is consistent with Section 11A of the Act \11\ 
and Rule 608 thereunder.\12\
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    \7\ 15 U.S.C. 78k-1.
    \8\ 15 U.S.C. 78k-1(a)(3)(B).
    \9\ 17 CFR 242.608.
    \10\ 17 CFR 242.608(b)(2).
    \11\ 15 U.S.C. 78k-1
    \12\ 17 CFR 242.608
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    The Commission believes that the ORSA Plan, which would permit the 
Exchanges to pool their resources for the regulation and surveillance 
of insider trading, should allow the Exchanges to more efficiently 
implement an enhanced surveillance program for the detection of insider 
trading, while eliminating redundant effort. In this regard, the 
Commission believes that the ORSA Plan should promote more effective 
regulation and surveillance of insider trading across all the options 
markets maintained by the Exchanges.
    In approving the ORSA Plan, the Commission is authorizing the 
Exchanges to work together according to the procedures provided for 
under the ORSA Plan. The Commission is not approving or disapproving 
the terms of the RSA, nor is the Commission passing judgment on the 
surveillance performance of CBOE or the other Exchanges, acting 
individually or jointly under the ORSA Plan, or on the quality of their 
surveillance standards or any other parameters used for regulatory and 
surveillance functions. The ultimate responsibility and primary 
liability for self-regulatory failures remains with each Exchange, and 
the ORSA Plan does not relieve an Exchange of its obligations as a 
self-regulatory organization under the Act. In this regard, the ORSA 
Plan specifically provides that each Exchange remains responsible to 
enforce compliance by persons subject to its regulatory jurisdiction 
with its own rules, the Act, and the rules and regulations thereunder.

IV. Conclusion

    It is hereby ordered, pursuant to section 11A of the Act,\13\ and 
Rule 608 thereunder,\14\ that the ORSA Plan submitted by the Exchanges 
is approved.
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    \13\ 15 U.S.C. 78k-1.
    \14\ 17 CFR 242.608.

    By the Commission.
Jill M. Peterson
Assistant Secretary.
[FR Doc. 06-5375 Filed 6-13-06; 8:45 am]

BILLING CODE 8010-01-M