Document ID: SEC-2005-0258-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: National Stock Exchange
Posted Date: 2005-11-22T05:00Z

[Federal Register: November 22, 2005 (Volume 70, Number 224)]
[Notices]               
[Page 70648-70650]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr22no05-115]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52774; File No. SR-NSX-2005-07]

 
Self-Regulatory Organizations; National Stock Exchange; Order 
Approving Proposed Rule Change, and Amendment Nos. 1, 2, and 3, 
Thereto, Relating to the Creation of a Regulatory Oversight Committee

November 15, 2005.

I. Introduction

    On August 1, 2005, the National Stock Exchange SM 
(``NSX'' SM or ``Exchange'') filed with the Securities and 
Exchange Commission (``Commission''), pursuant to Section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to create a Regulatory Oversight 
Committee (``ROC''). Notice of the proposed rule change, as amended, 
was published for comment in the Federal Register on October 14, 
2005.\3\ No comments were received regarding the proposal. This order 
approves the proposed rule change, as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 52573 (October 7, 
2005), 70 FR 60113 (``Notice'').
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II. Description of the Proposed Rule Change

    NSX proposes to amend the text of Article VI, Section 1.1 of the 
Exchange's By-Laws to allow it to create, and specifically identify, a 
ROC that would be subject to the control and supervision of NSX's Board 
of Directors (``NSX Board''). The NSX also proposes to establish a 
Regulatory Oversight Committee Charter (``ROC Charter'') that would set 
forth the functions, scope of responsibilities and composition of the 
ROC.
    NSX filed the proposed rule change in accordance with undertakings 
made by it and as set forth in Section III.F.1. of the Order 
Instituting Administrative and Cease-And-Desist Proceedings Pursuant to 
Sections 19(b) and 21C of the Securities Exchange Act of 1934, Making 
Findings, and Imposing Sanctions entered May 19, 2005.\4\ In its 
filing, NSX represented that the ROC Charter would include provisions 
that mirror the terms of its undertaking to the Commission and 
certification procedures that are consistent with the certification 
procedures contained in the Order.\5\
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    \4\ See In the Matter of National Stock Exchange and David 
Colker, Securities Exchange Act Release No. 51715 (May 19, 2005) 
(``Administrative Order'') at Section III.F.1.
    \5\ See Notice.
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    Pursuant to the ROC Charter, the ROC shall be responsible for 
overseeing all of NSX's regulatory functions and responsibilities and 
to advise regularly NSX's Board about NSX's regulatory matters.\6\ 
Specifically, the ROC shall: \7\ (i) Oversee NSX's regulatory functions 
to enforce compliance with the federal securities laws and NSX rules, 
including monitoring the design, implementation, and effectiveness of 
NSX's regulatory programs; (ii) recommend to the NSX Board an adequate 
operating budget for NSX's regulatory functions; (iii) approve the 
promulgation, filing, or issuance of new rules, rule amendments, rule 
interpretations, and regulatory circulars; (iv) take any other action 
necessary to fulfill its oversight and advisory responsibilities; and 
(v) adopt policies and procedures to ensure the independence of NSX's 
Chief Regulatory Officer (the ``CRO''). The ROC shall also:
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    \6\ Proposed ROC Charter.
    \7\ Proposed ROC Charter, Section A.
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     Be authorized to retain, at NSX's expense, outside counsel 
and consultants as it deems appropriate to carry out its 
responsibilities; \8\
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    \8\ Proposed ROC Charter, Section B.
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     On at least an annual basis, report to the NSX Board on 
the state of the Exchange's regulatory program; and \9\
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    \9\ Proposed ROC Charter, Section C.
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     Create and maintain complete minutes of all of its 
meetings, and create and maintain records reflecting the ROC's 
recommendations or proposals made to NSX Board, and NSX Board's 
decision as to each such recommendation proposal.\10\
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    \10\ Proposed ROC Charter, Section D.
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    In the event that the ROC's recommended operating budget for NSX's 
regulatory functions either: (1) Is less than the previous year's 
budget by a material amount, (2) is rejected by the NSX Board, (3) is 
reduced by the NSX Board by a material amount, or (4) is altered by the 
NSX Board in a manner that, in the judgment of the ROC, materially 
impairs the ability of NSX to meet its regulatory obligations, then NSX 
shall, within fifteen (15) business

[[Page 70649]]

days of such NSX Board action, notify the Director of the Commission's 
Division of Market Regulation in writing, providing copies of all 
minutes and other records reflecting the ROC's budget proposal and the 
NSX Board's decision regarding such proposal.\11\
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    \11\ Proposed ROC Charter, Section E.
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    The CRO shall certify compliance with the required items of the 
Administrative Order to the ROC on a form and frequency basis set by 
the ROC, and shall have the authority to require such additional 
compliance certification from the staff as he deems appropriate and in 
such forms as he may prescribe.\12\
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    \12\ Proposed ROC Charter, Section A.
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    In accordance with the functions and responsibilities set forth 
above, the ROC shall perform certain oversight functions with respect 
to the CRO and other regulatory personnel. Specifically, NSX 
represented in its filing that the ROC shall: \13\
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    \13\ See Notice.
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     Review with the Exchange's CRO and other appropriate 
regulatory personnel various aspects of the design, implementation, and 
effectiveness of NSX's regulatory programs;
     Review, revise, or approve the CRO's recommendation for a 
regulatory budget to formulate the ROC's recommendation of an adequate 
operating budget and staffing level for NSX's regulatory function to 
the Board;
     Review, evaluate, and, if appropriate, recommend to the 
Board the implementation of any and all actions recommended by the CRO 
and the Regulatory Services Division (``NSX Regulatory Division'') to 
fulfill the NSX Regulatory Division's and the ROC's oversight and 
advisory responsibilities;
     Assess the performance of the CRO and review the CRO's 
assessment of the NSX Regulatory Division's staff in fulfilling their 
responsibilities and recommend compensation and personnel actions to 
the NSX Board; and
     Review, amend, approve or reject the CRO's recommendations 
respecting the promulgation, filing, or issuance of new rules, rule 
amendments, rule interpretations, and regulatory circulars, including 
the approval (or ratification) of all regulatory circulars issued by 
the NSX within thirty five days of the issuance of such regulatory 
circulars.
    In addition, NSX represented that, on at least an annual basis, the 
ROC will review the structural protections that separate NSX's 
regulatory function from its commercial interests by reviewing the 
supervisory responsibilities of its Chief Executive Officer (``CEO'') 
and CRO. Further, the ROC will take all steps necessary to provide 
reasonable assurance that NSX is and remains in compliance with the 
Administrative Order and will take any other action necessary to 
fulfill its oversight and advisory responsibilities.\14\
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    \14\ Id.
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    The ROC shall be comprised of no less than three members, who have 
been appointed by NSX's Chairman with the approval of the NSX Board in 
a composition consistent with federal securities laws and NSX's By-Laws 
and Rules. At a minimum, the ROC members shall not be, nor have been 
during the preceding three years, employees of NSX or any NSX member 
firm. The ROC shall elect a Chairperson from among its members.\15\
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    \15\ Proposed ROC Charter.
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III. Discussion and Commission Findings

    The Commission has reviewed the proposed rule change, as amended, 
and finds that it is consistent with the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\16\ Specifically, the Commission finds that the proposed rule 
change, as amended, furthers the objectives of Section 6(b)(1) \17\ of 
the Act, which requires the Exchange to be so organized and have the 
capacity to be able to carry out the purposes of the Act and to comply, 
and to enforce compliance by its members, with the Act and the rules of 
the Exchange. In addition, the Commission finds that the proposed rule 
change, as amended, is consistent with Section 6(b)(5) of the Act,\18\ 
which requires, among other things, that the rules of a national 
securities exchange be designed to promote just and equitable 
principles of trade, 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.
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    \16\ In approving this proposed rule change, the Commission 
notes that it has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \17\ 15 U.S.C. 78f(b)(1).
    \18\ 15 U.S.C. 78f(b)(5).
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    An exchange's governance structure should be designed to assure 
that its regulatory function is strong, vigorous, and sufficiently 
independent and insulated from improper influence from management or 
any regulated entity. In the Commission's view, the proposal is 
designed to advance this goal. The proposed amendments provide for a 
ROC which will be composed of members that shall not be, nor have been 
during the preceding three years, employees of NSX or any NSX member 
firm. The ROC will be responsible for oversight of all of NSX's 
regulatory functions and responsibilities, including, among other 
things, approving new NSX rules and adopting policies and procedures to 
ensure the independence of the NSX's CRO. Also, the ROC will review, on 
at least an annual basis, the structural protections that separate 
NSX's regulatory function from its commercial interests by reviewing 
the supervisory responsibilities of NSX's CEO and CRO.\19\ The 
Commission believes that these proposed amendments to the NSX's 
governance structure will add a degree of independence that should 
serve to insulate NSX's regulatory activity from its economic 
interests. As noted above, the Commission notes that NSX filed the 
proposed rule change in accordance with its undertakings as set forth 
in the Administrative Order, and represented that the proposed rule 
change includes provisions that mirror the terms of the undertaking. 
The Commission believes that in this context, the Exchange's proposal 
is consistent with the statutory requirements under Section 6(b)(1) of 
the Act.\20\ The Commission notes that it is in the process of 
reviewing a range of governance issues relating to self-regulatory 
organizations (``SROs''), including possible steps to strengthen the 
framework for the governance of SROs and ways to improve the 
transparency of the governance procedures for all SROs, and has 
proposed rules in furtherance of this goal, including proposed rules 
relating to an exchange's ROC.\21\ Depending on the results of the 
proposed rules, NSX may be required to make further changes to 
strengthen its governance structure and ensure that its ROC continues 
to comply with federal securities laws.
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    \19\ See supra note 14 and accompanying text.
    \20\ 15 U.S.C. 78f(b)(1).
    \21\ See Securities Exchange Act Release No. 50699 (November 18, 
2004), 69 FR 71126 (December 8, 2004).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\22\ that the proposed rule change (File No. SR-NSX-2005-07) and 
Amendment Nos. 1, 2, and 3, thereto be, and hereby are, approved.
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    \22\ 15 U.S.C. 78s(b)(2).

[[Page 70650]]

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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\23\
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    \23\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. E5-6409 Filed 11-21-05; 8:45 am]

BILLING CODE 8010-01-P