Document ID: SEC-2007-0571-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: National Stock Exchange, Inc.
Posted Date: 2007-04-19T04:00Z

[Federal Register: April 19, 2007 (Volume 72, Number 75)]
[Notices]               
[Page 19733-19737]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr19ap07-65]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55631; File No. SR-NSX-2006-16]

 
Self-Regulatory Organizations; National Stock Exchange, Inc.; 
Notice of Filing of Proposed Rule Change and Amendment No. 1 Thereto 
Regarding the Annual Certification of Compliance and Supervisory 
Processes

April 13, 2007.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on November 22, 2006, the National Stock Exchange, Inc. (``NSX'' 
or ``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. On April 
9, 2007, the NSX filed Amendment No. 1 to the proposed rule change 
(``Amendment No. 1'').\3\ The Commission is publishing this notice to 
solicit comments on the proposed rule change, as amended, from 
interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1, which supplemented the original filing, the 
NSX provided more information regarding the certification process 
and corrected a grammatical error.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to adopt NSX Rule 5.7 and accompanying 
Interpretations and Policies .01 (Annual Compliance and Supervision 
Certification) to require each Equity Trading Permit (``ETP'') Holder's 
Chief Executive Officer (``CEO'') to certify annually to having in 
place a process to establish, maintain, review, modify, and test 
policies and procedures reasonably designed to achieve compliance with 
applicable Rules of the Exchange, and federal securities laws and 
regulations. The text of the proposed rule and interpretation is set 
forth below. Proposed new language is italicized.
* * * * *

CHAPTER V.

SUPERVISION

* * * * *
Rule 5.7. Annual Certification of Compliance and Supervisory Processes
    Each ETP Holder shall have its chief executive officer (or 
equivalent officer) certify annually, as set forth in

[[Page 19734]]

Interpretations and Policies .01, that the ETP Holder has in place 
processes to establish, maintain, review, test and modify written 
compliance policies and written supervisory procedures reasonably 
designed to achieve compliance with applicable Rules of the Exchange 
and federal securities laws and regulations.

Interpretations and Policies .01 Annual Compliance and Supervision 
Certification

    The Exchange is issuing this interpretation to Rule 5.7, which 
requires that the ETP Holder's chief executive officer (or equivalent 
officer) execute annually a certification that the ETP Holder has in 
place processes to establish, maintain, review, test and modify written 
compliance policies and written supervisory procedures reasonably 
designed to achieve compliance with applicable Rules of the Exchange 
and federal securities laws and regulations. The certification for each 
ensuing year shall be effected no later than on the anniversary date of 
the previous year's certification. The certification shall state the 
following:

Annual Compliance and Supervision Certification

    The undersigned is the chief executive officer (or equivalent 
officer) of [name of ETP Holder corporation/partnership/sole 
proprietorship] (the ``ETP Holder''). As required by Rule 5.7, the 
undersigned makes the following certification:
    1. The ETP Holder has in place processes to:
    (a) Establish, maintain and review policies and procedures 
reasonably designed to achieve compliance with applicable Rules of the 
National Stock Exchange, Inc. and federal securities laws and 
regulations;
    (b) Modify such policies and procedures as business, regulatory and 
legislative changes and events dictate; and
    (c) Test the effectiveness of such policies and procedures on a 
periodic basis, the timing and extent of which is reasonably designed 
to ensure continuing compliance with Rules of the National Stock 
Exchange, Inc. and federal securities laws and regulations.
    2. The undersigned chief executive officer (or equivalent officer) 
has conducted one or more meetings with the chief compliance officer in 
the preceding 12 months, the subject of which satisfy the obligations 
set forth in Interpretations and Policies .01 to Rule 5.7.
    3. The ETP Holder's processes, with respect to paragraph 1 above, 
are evidenced in a report reviewed by the chief executive officer (or 
equivalent officer), chief compliance officer, and such other officers 
as the ETP Holder may deem necessary to make this certification. The 
final report has been submitted to the ETP Holder's board of directors 
and audit committee or will be submitted to the ETP Holder's board of 
directors and audit committee (or equivalent bodies) at the earlier of 
their next scheduled meetings or within 45 days of the date of 
execution of this certification.
    4. The undersigned chief executive officer (or equivalent officer) 
has consulted with the chief compliance officer and other officers as 
applicable (referenced in paragraph 3 above) and such other employees, 
outside consultants, lawyers and accountants, to the extent deemed 
appropriate, in order to attest to the statements made in this 
certification.
* * * * *
    The Exchange provides the following guidance in completing the 
Certification above. Included in the processes requirement is an 
obligation on the part of the ETP Holder to conduct one or more 
meetings annually between the chief executive officer (or equivalent 
officer) and the chief compliance officer to: (1) Discuss and review 
the matters that are subject of the certification; (2) discuss and 
review the ETP Holder 's compliance efforts as of the date of such 
meetings; and (3) identify and address significant compliance problems 
and plans for emerging business areas.
    The report required in paragraph 3 of the certification must 
document the ETP Holder's processes for establishing, maintaining, 
reviewing, testing and modifying compliance policies, that are 
reasonably designed to achieve compliance with applicable NSX rules and 
federal securities laws and regulations, and any principal designated 
by the ETP Holder may prepare the report. The report must be produced 
prior to execution of the certification and be reviewed by the chief 
executive officer (or equivalent officer), chief compliance officer and 
any other officers the ETP Holder deems necessary to make the 
certification and must be provided to the ETP Holder's board of 
directors and audit committee in final form either prior to execution 
of the certification or at the earlier of their next scheduled meetings 
or within 45 days of execution of the certification. The report should 
include the manner and frequency in which the processes are 
administered, as well as the identification of officers and supervisors 
who have responsibility for such administration. The report need not 
contain any conclusions produced as a result of following the processes 
set forth therein. The report may be combined with any other compliance 
report or other similar report required by any other self-regulatory 
organization provided that: (1) Such report is clearly titled in a 
manner indicating that it is responsive to the requirements of the 
certification and Rule 5.7; (2) an ETP Holder that submits a report for 
review in response to a NSX request must submit the report in its 
entirety; and (3) the ETP Holder makes such report in a timely manner, 
i.e., annually.
* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant parts of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    It is critical that each NSX ETP Holder understand the importance 
of employing comprehensive and effective compliance policies and 
written supervisory procedures. Compliance with applicable NSX rules 
and Federal securities laws and regulations is the foundation of 
ensuring investor protection and market integrity and is essential to 
the efficacy of self-regulation. Consequently, the Exchange is 
proposing to adopt Rule 5.7, that would require ETP Holders to have 
their CEOs, or equivalent officer, certify annually to having in place 
processes to establish, maintain, review, modify, and test policies and 
procedures reasonably designed to achieve compliance with applicable 
NSX rules, and Federal securities laws and regulations.\4\
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    \4\ This new rule should not impose substantial new obligations 
on NSX ETP Holders as the National Association of Securities 
Dealers, Inc. (``NASD'') and the New York Stock Exchange LLC 
(``NYSE'') have implemented similar rules. See NASD Rule 3013(b) and 
Interpretative Material--3013 (``IM 3013'') (effective Dec. 1, 2004; 
amendment to IM 3013 effective March 17, 2006); NYSE Rule 342.30 
(effective Nov. 16, 2005). As a result, a similar requirement is 
already in place for NASD and NYSE member firms, addressing member 
firms' compliance with the rules of those self-regulatory 
organizations. The first certifications pursuant to those rules were 
due by April 1, 2006.

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[[Page 19735]]

    Specifically, the proposed rule change would require the CEO to 
certify annually that senior executive management has in place 
processes to: (1) Establish and maintain policies and procedures 
reasonably designed to achieve compliance with applicable NSX rules and 
Federal securities laws and regulations; (2) modify such policies and 
procedures as business, regulatory and legislative changes and events 
dictate; and (3) test the effectiveness of such policies and procedures 
on a periodic basis, the timing of which is reasonably designed to 
ensure continuing compliance with applicable NSX rules, and Federal 
securities laws and regulations. The proposed rule change further would 
require the CEO to certify that those processes are evidenced in a 
report that has been reviewed by those executing the certification, as 
well as the member's board of directors and audit committee. The 
proposed rule change also would create a new Interpretation and Policy 
.01 to Rule 5.7, which sets forth the language of the certification and 
gives further guidance as to the requirements and limitations of the 
rule.
    The proposed rule change states that included in this processes 
requirement is an obligation on the part of the ETP Holder to conduct 
one or more meetings annually between the CEO (or equivalent officer) 
and the chief compliance officer to: (1) Discuss and review the matters 
that are subject of the certification; (2) discuss and review the ETP 
Holder's compliance efforts as of the date of such meetings; and (3) 
identify and address significant compliance problems and plans for 
emerging business areas. The CEO also may be the same person as the 
chief compliance officer.
    As noted in the proposed rule change, the periodic and content 
requirements for meetings between the CEO (or equivalent officer) and 
the chief compliance officer, as well as the pertinent requirements of 
paragraphs 3 and 4 of the certification, are intended to indicate the 
unique and integral role of the chief compliance officer both in the 
discharge of certain compliance processes and the reporting 
requirements that are the subject matter of the certification and in 
providing a reliable basis upon with the CEO can execute the 
certification. The chief compliance officer is the primary advisor to 
the ETP Holder on its overall compliance scheme and the particularized 
rules, policies and procedures that the ETP Holder adopts. This is 
because the chief compliance officer should have an expertise in the 
process of: (1) Gaining an understanding of the products, services or 
line functions that need to be the subject of written compliance 
policies and written supervisory procedures; (2) identifying the 
relevant rules, regulations, laws and standards of conduct pertaining 
to such products, services or line functions based on experience and/or 
consultation with those persons who have a technical expertise in such 
areas of the ETP Holder's business; (3) developing, or advising other 
business persons charged with the obligation to develop, policies and 
procedures that are reasonably designed to achieve compliance with 
those relevant rules, regulations, laws and standards of conduct; (4) 
evidencing the supervision by the line managers who are responsible for 
the execution of compliance policies; and (5) developing programs to 
test compliance with the ETP Holder's policies and procedures.
    It is that expertise in the process of compliance that makes the 
chief compliance officer an indispensable party to enable the CEO to 
reach the conclusions stated in the certification. Consequently, any 
certification made by a CEO under circumstances where the chief 
compliance officer has concluded, after consultation, that there is an 
inadequate basis for making such certification would be, without 
limitation, conduct inconsistent with the observance of the high 
standards of commercial honor, and the just and equitable principles of 
trade--a violation of NSX Rule 3.1. Beyond the certification 
requirement, it is the intention of both Rule 5.7 and Interpretations 
and Policies .01 to foster regular and significant interaction between 
senior management and the chief compliance officer regarding the ETP 
Holder's comprehensive compliance program.
    The chief compliance officer and other compliance officers that 
report to the chief compliance officer (as described in the sentence 
that immediately follows) shall perform the compliance functions 
contemplated under paragraphs 3 and 4 of the certification. Nothing 
herein is intended to limit or discourage the participation of other 
employees both within and outside the ETP Holder's compliance 
department in any aspect of the ETP Holder's compliance programs or 
processes, including those matters discussed herein. However, it is 
understood that the chief compliance officer and, where applicable, the 
most senior compliance officers having primary compliance department 
responsibility for each of the ETP Holder's business segments, will 
retain responsibility for the compliance functions contemplated by 
paragraphs 3 and 4 of the certification.
    As may be necessary to render their views and advice, the chief 
compliance officer and the other officers referenced in paragraph 3 of 
the certification who consult with the CEO (or equivalent officer) 
pursuant to paragraph 4, shall, in turn, consult with other employees, 
officers, outside consultants, lawyers and accountants.
    The Exchange recognizes that supervisors with business line 
responsibility are accountable for the discharge of an ETP Holder's 
compliance policies and written supervisory procedures. The signatory 
to the certification is certifying only as to having processes in place 
to establish, maintain, review, test and modify the ETP Holder's 
written compliance and supervisory policies and procedures and the 
execution of this certification and any consultation rendered in 
connection with such certification does not by itself establish 
business line responsibility.
    The requirement that an ETP Holder's processes include providing 
the report to the board of directors and audit committee (required by 
paragraph 3 of the certification) does not apply to ETP Holders that do 
not utilize these types of governing bodies and committees in the 
conduct of their business.\5\
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    \5\ As a part of their process, ETP Holders must have the report 
reviewed by their governing bodies and committees that serve similar 
functions in lieu of a board of directors and audit committee.
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    The report required in paragraph 3 of the certification must 
document the ETP Holder's processes for establishing, maintaining, 
reviewing, testing and modifying compliance policies, that are 
reasonably designed to achieve compliance with applicable NSX rules and 
Federal securities laws and regulations. Any principal designated by 
the ETP Holder may prepare the report. The report must be produced 
prior to execution of the certification and be reviewed by the CEO (or 
equivalent officer), chief compliance officer and any other officers 
the ETP Holder deems necessary to make the certification and must be 
provided to the ETP Holder's board of directors and audit committee in 
final form either prior to execution of the certification, at the 
earlier of their next scheduled meetings or within 45 days of execution 
of the certification. The report should include the manner and 
frequency in which the processes are administered,

[[Page 19736]]

as well as the identification of officers and supervisors who have 
responsibility for such administration. The report need not contain any 
conclusions produced as a result of following the processes set forth 
therein. The report may be combined with any other compliance report or 
other similar report required by any other self-regulatory organization 
provided that: (1) Such report is clearly titled in a manner indicating 
that it is responsive to the requirements of the certification and Rule 
5.7; (2) an ETP Holder that submits a report for review in response to 
a NSX request must submit the report in its entirety; and (3) the ETP 
Holder makes such report in a timely manner, for example, annually.
    In summary, this proposal recognizes that responsibility for 
discharging compliance policies and written supervisory procedures 
rests with business line supervisors. The proposal also clarifies that 
execution of the certification does not by itself establish a signatory 
as having such line supervisory responsibility. The proposal also sets 
forth the particulars regarding the report that must evidence a 
member's compliance processes. It states that the report must be 
produced prior to execution of the certification and reviewed by the 
CEO, and such other officers as the member deems necessary. The report 
also must include the manner and frequency in which the processes are 
administered and identify those officers and supervisors with 
responsibility for such administration. The report need not contain 
conclusions that result from following the specified processes, such as 
compliance deficiencies. Additionally, the report may be combined with 
other reports required by a self-regulatory organization, provided the 
report is made annually, clearly indicates in the title that it 
contains the information required by Rule 5.7, and that the entire 
report is provided in response to any regulatory request for all or 
part of the combined report. Finally, with respect to review of the 
report, this clarifies that review by a member's board of directors and 
audit committee only applies to those members whose corporate 
governance structure have such or similar governing bodies and 
committees--it does not impose a requirement that members create them 
if they do not currently exist.
    ETP Holders should understand that the requirements of Rule 5.7 and 
Interpretations and Policies .01 represent, in part, a principle-based 
requirement to certify that the ETP Holder has in place processes to 
establish, maintain, review, test and modify written compliance 
policies and written supervisory procedures reasonably designed to 
achieve compliance with applicable NSX rules and Federal securities 
laws and regulations. Consequently, compliance with the periodic and 
content requirements of the Interpretation pertaining to meetings 
between the CEO (or equivalent officer) and the chief compliance 
officer does not satisfy the full extent of these principle-based 
obligations that will vary with the facts and circumstances of an ETP 
Holder's business activities and organizational structure. Moreover, 
NSX emphasizes the testing aspect of this principle-based requirement; 
an integral purpose of NSX rules pertaining to supervision is that ETP 
Holders adopt policies and procedures that are effective as to both the 
scope of, and the achievement of compliance with, applicable NSX rules, 
and Federal securities laws and regulations.
    NSX believes the proposal provides an effective mechanism to compel 
substantial and purposeful interaction between senior management and 
compliance personnel, thereby enhancing the quality of ETP Holders' 
supervisory and compliance systems. NSX further believes the rule 
change imposes the minimal additional burden on ETP Holders that is 
necessary to achieve the proposal's purpose, as the firms are already 
obligated to provide similar certifications in connection with rules of 
other self-regulatory organizations.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act,\6\ in general, and furthers the 
objectives of Section 6(b)(5) \7\ of the Act, in particular, in that it 
is designed to promote just and equitable principles of trade, to 
prevent fraudulent and manipulative acts and practices, and, in 
general, to protect investors and the public interest. NSX believes 
that that the proposed rule change is consistent with the provisions of 
the Act noted above in that it will enhance focus on ETP Holders' 
compliance and supervision systems, thereby decreasing the likelihood 
of fraud and manipulative acts and increasing investor protection.
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    \6\ 15 U.S.C. 78(f)(b).
    \7\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change would 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    The Exchange has neither solicited nor received written comments on 
the proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the publication of this notice in the Federal 
Register or within such longer period (i) As the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the NSX consents, the Commission will:
    (A) By order approve the proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or     Send an e-mail to rule-comments@sec.gov. Please include 

File Number SR-NSX-2006-16 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File No. SR-NSX-2006-16. This file 
number should be included in the subject line if e-mail is used. To 
help the Commission process and review comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml
). Copies of the submission, all subsequent amendments, all 

written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the

[[Page 19737]]

proposed rule change between the Commission and any person, other than 
those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for inspection and 
copying in the Commission's Public Reference Room. Copies of such 
filings also will be available for inspection and copying at the 
principal office of the Exchange. All comments received will be posted 
without change; the Commission does not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly. All submissions should refer to 
file number SR-NSX-2006-16 and should be submitted on or before May 10, 
2007.

    For the Commission by the Division of Market Regulation, 
pursuant to the delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-7428 Filed 4-18-07; 8:45 am]

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