Document ID: SEC-2008-1727-0001
Agency: sec
Document Type: Notice
Title: Program for Allocation of Regulatory Responsibilities: International Securities Exchange, LLC and the Financial Industry Regulatory Authority, Inc.
Posted Date: 2008-12-30T05:00Z

[Federal Register: December 30, 2008 (Volume 73, Number 250)]
[Notices]               
[Page 79943-79944]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr30de08-141]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59134; File No. 4-574]

 
Program for Allocation of Regulatory Responsibilities Pursuant to 
Rule 17d-2; Order Approving and Declaring Effective a Plan for the 
Allocation of Regulatory Responsibilities Between the International 
Securities Exchange, LLC and the Financial Industry Regulatory 
Authority, Inc.

 December 22, 2008.
    Notice is hereby given that the Securities and Exchange Commission 
(``Commission'') has issued an Order, pursuant to Sections 17(d)\1\ and 
11A(a)(3)(B)\2\ of the Securities Exchange Act of 1934 (``Act''), 
approving and declaring effective a plan for the allocation of 
regulatory responsibilities (``Plan'') that was filed pursuant to Rule 
17d-2 under the Act \3\ by the International Securities Exchange, LLC 
(``ISE'') and the Financial Industry Regulatory Authority, Inc. 
(``FINRA'') (together with ISE, the ``Parties'').\4\
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    \1\ 15 U.S.C. 78q(d).
    \2\ 15 U.S.C. 78k-1(a)(3)(B).
    \3\ 17 CFR 240.17d-2.
    \4\ See Securities Exchange Act Release No. 59003 (November 24, 
2008), 73 FR 72873 (December 1, 2008) (``Notice'').
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    Accordingly, FINRA shall assume, in addition to the regulatory 
responsibility it has under the Act, the regulatory responsibilities 
allocated to it under the Plan. At the same time, ISE is relieved of 
those regulatory responsibilities allocated to FINRA under the Plan.

I. Introduction

    Section 19(g)(1) of the Act,\5\ among other things, requires every 
self-regulatory organization (``SRO'') registered as either a national 
securities exchange or registered 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)\6\ or 19(g)(2)\7\ of the Act. Section 
17(d)(1) of the Act \8\ 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'').\9\ 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 perform other specified regulatory functions.
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    \5\ 15 U.S.C. 78s(g)(1).
    \6\ 15 U.S.C. 78q(d).
    \7\ 15 U.S.C. 78s(g)(2).
    \8\ 15 U.S.C. 78q(d)(1).
    \9\ 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 \10\ and Rule 17d-2 \11\ under the Act. Rule 17d-2 permits 
SROs to propose joint plans for the allocation of regulatory 
responsibilities, other than financial responsibility rules, 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. Upon 
effectiveness of a plan filed pursuant to Rule 17d-2, an SRO is 
relieved of those regulatory responsibilities for common members that 
are allocated by the plan to another SRO.
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    \10\ 17 CFR 240.17d-1. 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.
    \11\ 17 CFR 240.17d-2.
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    On December 1, 2008, the Commission published notice of the Plan 
filed by ISE and FINRA.\12\ The Commission received no comments on the 
Plan. The Plan is separate from the agreement made pursuant to Rule 
17d-2 between ISE and FINRA entered into on December 20, 2006 (the 
``Foundation Plan'').\13\ This Plan supplements the Foundation Plan by 
delineating regulatory responsibilities between the Parties, including 
responsibility for ISE rules, with respect to Direct Edge ECN, LLC 
(``DE ECN''), which is a common member of FINRA and ISE, and which also 
is affiliated with ISE.\14\
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    \12\ See Notice, supra note 4.
    \13\ See Securities Exchange Act Release No. 55367 (February 27, 
2007), 72 FR 9983 (March 6, 2007). Pursuant to the Foundation Plan, 
FINRA has assumed certain inspection, examination, and enforcement 
responsibility for common members, including ISE Route LLC, the 
outbound Router Member, with respect to certain applicable laws, 
rules, and regulations.
    \14\ On November 17, 2008, the Commission published notice of a 
proposed rule change by the ISE relating to the proposed acquisition 
by ISE Holdings, Inc., the parent of ISE, of an equity interest in 
Direct Edge Holdings LLC (``Direct Edge'') in exchange for cash and 
the ISE's equities trading facility, ISE Stock Exchange, LLC (``ISE 
Stock''). After such transaction, (1) Direct Edge, through a 
subsidiary, will own and operate ISE Stock as a facility of ISE and 
(2) ISE Holdings will have a 31.54% equity interest in Direct Edge, 
which wholly owns and operates an Electronic Access Member of ISE, 
DE ECN. Recognizing the potential for conflicts of interest in 
instances where an exchange is affiliated with one of its members, 
ISE proposed ISE Rule 312(b), which imposes several conditions and 
limitations to the affiliation between ISE and DE ECN, one of which 
is that ISE enter into a 17d-2 plan with a non-affiliated self-
regulatory organization to regulate and oversee the activities of DE 
ECN. The Plan is intended to satisfy this condition. See Securities 
Exchange Act Release No. 58918 (November 7, 2008), 73 FR 67909 
(November 17, 2008).
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    The text of the Plan allocates regulatory responsibilities among 
the Parties with respect to DE ECN, which is a common member. Included 
in the Plan is an attachment (the ``ISE

[[Page 79944]]

Certification of Common Rules,'' referred to herein as the 
``Certification'') that lists every ISE rule and federal securities law 
and rule and regulation thereunder for which, under the Plan, FINRA 
would bear responsibility for examining, and enforcing compliance by, 
DE ECN.

II. 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(c) 
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 to FINRA certain 
responsibilities for DE ECN, a common member, that would otherwise be 
performed by both ISE and FINRA. Accordingly, the proposed Plan 
promotes efficiency by reducing costs to DE ECN. Furthermore, because 
ISE and FINRA will coordinate their regulatory functions in accordance 
with the Plan, the Plan should promote investor protection.
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    \15\ 15 U.S.C. 78q(d).
    \16\ 17 CFR 240.17d-2(c).
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    The Commission notes that, under the Plan, ISE and FINRA have 
allocated regulatory responsibility for all ISE rules that are 
substantially similar to FINRA rules in that ISE's rule would not 
require FINRA to develop one or more new examination standards, 
modules, procedures, or criteria in order to analyze the application of 
the rule, or a dual member's activity, conduct, or output in relation 
to such rule (``Common Rules''). These Common Rules are specifically 
listed in the Certification. In addition, under the Plan, FINRA would 
assume regulatory responsibility for any provisions of the federal 
securities laws and the rules and regulations thereunder that are set 
forth in the Certification.\17\
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    \17\ As proposed currently, however, there are no federal 
securities rules listed on the Certification. Therefore, at present, 
ISE has not been relieved of any regulatory responsibilities, 
pursuant to the Plan, for any provisions of the federal securities 
laws and the rules and regulations thereunder.
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    The Plan further provides that FINRA shall not assume regulatory 
responsibility, and ISE will retain full responsibility, for: (1) 
Surveillance, examination, investigation, and enforcement with respect 
to trading activities or practices involving ISE's own marketplace; (2) 
registration pursuant to ISE's applicable rules of associated persons 
(i.e., registration rules that are not Common Rules); (3) ISE's duties 
as a DEA under Rule 17d-1 of the Act; \18\ and (4) any rules of ISE 
that do not qualify as Common Rules, except that FINRA shall be 
responsible for such rules with respect to any ISE member that operates 
as a facility,\19\ acts as an inbound router for ISE, and is a member 
of ISE and FINRA (``Inbound Router Member'').\20\ Apparent violations 
of any ISE rules by the Inbound Router Member will be processed by 
FINRA, and FINRA will conduct any enforcement proceedings. The effect 
of these provisions is that regulatory oversight and enforcement 
responsibilities for the Inbound Router Member will be vested with 
FINRA. These provisions should help avoid any potential conflicts of 
interest that could arise if ISE was primarily responsible for 
regulating the Inbound Router Member, with which ISE is affiliated.\21\
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    \18\ 17 CFR 240.17d-1.
    \19\ See Section 3(a)(2) of the Act (defining ``facility''). 15 
U.S.C. 78c(a)(2).
    \20\ Currently, DE ECN is the only Inbound Router Member.
    \21\ See supra note 14.
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    According to the Plan, ISE will perform a review of the 
Certification, at least annually, or more frequently if required by 
changes in either the rules of ISE or FINRA, to add ISE rules not 
included on the then-current list of Common Rules that are 
substantially similar to FINRA rules (i.e., new rules that qualify as 
Common Rules or existing rules that have been amended so that they now 
qualify as Common Rules); delete ISE rules included in the then-current 
list of Common Rules that are no longer substantially similar to FINRA 
rules (i.e., amended rules that cease to be Common Rules); and confirm 
that the remaining rules on the list of Common Rules continue to be ISE 
rules that are substantially similar to FINRA rules. FINRA will then 
confirm in writing whether the rules listed in any updated list are 
Common Rules as defined in the Plan.
    The Commission is hereby declaring effective and approving a plan 
that, among other things, allocates regulatory responsibility to FINRA 
for the oversight and enforcement of all ISE rules that are 
substantially similar to the rules of FINRA for DE ECN, a common member 
of ISE and FINRA. Therefore, modifications to the Certification need 
not be filed with the Commission as an amendment to the Plan, provided 
that the Parties are only adding to, deleting from, or confirming 
changes to ISE rules in the Certification in conformance with the 
definition of Common Rules provided in the Plan. However, should ISE or 
FINRA decide to add an ISE rule to the Certification that is not 
substantially similar to an FINRA rule; delete an ISE rule from the 
Certification that is substantially similar to an FINRA rule; or leave 
on the Certification an ISE rule that is no longer substantially 
similar to an FINRA rule, then such a change would constitute an 
amendment to the Plan, which must be filed with the Commission pursuant 
to Rule 17d-2 under the Act.\22\
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    \22\ The Commission also notes that the addition to (or eventual 
deletion from) the Certification of any federal securities laws, 
rules, and regulations for which FINRA would bear responsibility 
under the Plan for examining, and enforcing compliance by, common 
members, would constitute an amendment to the Plan.
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    The Plan also permits ISE and FINRA to terminate the Plan, subject 
to notice, for various reasons.\23\
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    \23\ The Commission notes that paragraph 12 of the Plan reflects 
the fact that FINRA's responsibilities under the Plan will continue 
in effect until the earlier of (a) the date on which DE ECN ceases 
operations as a facility of ISE, or (b) the Commission approves the 
termination of the Plan.
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III. Conclusion

    This Order gives effect to the Plan filed with the Commission in 
File No. 4-574. The Parties shall notify all members affected by the 
Plan of their rights and obligations under the Plan.
    It is therefore ordered, pursuant to Sections 17(d) of the Act, 
that the Plan in File No. 4-574, between ISE and FINRA, filed pursuant 
to Rule 17d-2 under the Act, is approved and declared effective.
    It is therefore ordered that ISE is relieved of those 
responsibilities allocated to FINRA under the Plan in File No. 4-574.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\24\
Florence E. Harmon,
Acting Secretary.
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    \24\ 17 CFR 200.30-3(a)(34).
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 [FR Doc. E8-30861 Filed 12-29-08; 8:45 am]

BILLING CODE 8011-01-P