Document ID: SEC-2010-0667-0001
Agency: sec
Document Type: Notice
Title: Orders Approving and Declaring Effective Plans for Allocation of Regulatory Responsibilities: International Securities Exchange, LLC and Financial Industry Regulatory Authority, Inc., etc.
Posted Date: 2010-05-06T04:00Z

[Federal Register: May 6, 2010 (Volume 75, Number 87)]
[Notices]               
[Page 25004-25005]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr06my10-103]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-62000; File No. 4-596]

 
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. Concerning Ballista Securities LLC

April 29, 2010.
    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 (``17d-2 Plan'') that was filed pursuant to 
Rule 17d-2 \3\ under the Act by the International Securities Exchange, 
LLC (``ISE'') and the Financial Industry Regulatory Authority, Inc. 
(``FINRA'') (together with ISE, the ``Parties'').
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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.
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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) \4\ of the Act, 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) \5\ or 19(g)(2) \6\ of the Act. Section 
17(d)(1) \7\ of the Act 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''). 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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    \4\ 15 U.S.C. 78s(g)(1).
    \5\ 15 U.S.C. 78q(d).
    \6\ 15 U.S.C. 78s(g)(2).
    \7\ 15 U.S.C. 78q(d)(1).
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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. Rule 17d-2 \8\ 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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    \8\ 17 CFR 240.17d-1 and 17 CFR 240.17d-2, respectively.

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[[Page 25005]]

II. Ballista Securities LLC

    On June 5, 2009, ISE Holdings, Inc. (``ISE Holdings''), the parent 
of ISE, entered into a Membership Purchase Agreement with Optifreeze 
LLC (``Optifreeze''). ISE Holdings acquired membership interests in 
Optifreeze by contributing cash to the capital of Optifreeze. As a 
result of the purchase, ISE Holdings has an 8.57% membership interest 
in Optifreeze, which wholly-owns and operates an Electronic Access 
Member of the ISE, Ballista Securities LLC (``Ballista''). The 
ownership interest of ISE Holdings in Ballista is subject to the 
conditions set forth in the Commission's approval order relating to ISE 
Holdings' purchase of Optifreeze.\9\
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    \9\ See Securities Exchange Act Release No. 60598 (September 1, 
2009), 74 FR 46280 (September 8, 2009).
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    Recognizing that the Commission has previously expressed concern 
regarding (1) the potential for conflicts of interest in instances 
where an exchange is affiliated with one of its members, and (2) the 
potential for informational advantages that could place an affiliated 
member of an exchange at a competitive advantage vis-[agrave]-vis the 
other non-affiliated members, the ISE submitted a proposed rule change 
to amend ISE Rule 312 to permit the proposed affiliation subject to 
several conditions and limitations, including that a condition that the 
Exchange enter into a plan with a non-affiliated self-regulatory 
organization to regulate and oversee the activities of Ballista, 
pursuant to Rule 17d-2 under the Act.\10\
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    \10\ See Securities Exchange Act Release No. 60382 (July 24, 
2009), 74 FR 38068 (July 30, 2009).
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    On March 19, 2010, the Parties submitted the proposed 17d-2 Plan to 
the Commission. On April 13, 2010, the Commission published notice of 
the Plan filed by ISE and FINRA in the Federal Register.\11\ The 
Commission received no comments on the Plan. The text of the Plan 
allocates regulatory responsibilities among the Parties with respect to 
Ballista, which is a common member. Included in the Plan is an 
attachment (the ``ISE Rules Certification for 17d-2 Agreement with 
FINRA,'' 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, Ballista.
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    \11\ See Securities Exchange Act Release No. 61853 (April 6, 
2010), 75 FR 18925 (April 13, 2010).
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III. Discussion

    The Commission finds that the proposed Plan is consistent with the 
factors set forth in Section 17(d) \12\ of the Act and Rule 17d-2(c) 
\13\ thereunder 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. Among other 
things, the Commission believes that the proposed Plan should reduce 
unnecessary regulatory duplication by allocating to FINRA certain 
responsibilities for Ballista, a common member, that would otherwise be 
performed by both ISE and FINRA. Accordingly, the proposed Plan 
promotes efficiency by reducing costs to Ballista. Furthermore, because 
FINRA will be responsible for regulating Ballista instead of ISE, the 
plan should promote investor protection and help avoid any potential 
conflicts of interest that could arise if ISE was primarily responsible 
for regulating Ballista, with which ISE is affiliated.
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    \12\ 15 U.S.C. 78q(d).
    \13\ 17 CFR 240.17d-2(c).
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    The Commission notes that, under the Plan, FINRA would assume 
examination and enforcement responsibility relating to compliance by 
Ballista and persons associated therewith, with all applicable rules. 
Specifically, FINRA would assume examination and enforcement 
responsibility relating to compliance by Ballista and persons 
associated therewith, with the rules of ISE that are substantially 
similar to the rules of FINRA, as well as any provisions of the federal 
securities laws and the rules and regulations thereunder delineated in 
the Exhibit 1 to the 17d-2 Plan (``Common Rules''). In addition, under 
the Plan, FINRA would assume regulatory responsibility, with respect to 
Ballista, for all other ISE rules that do not qualify as Common Rules, 
as discussed below, on account of Ballista's status as an ``Inbound 
Router Member.''
    Under the 17d-2 Plan, ISE would retain full responsibility for 
surveillance, examination, investigation, and enforcement with respect 
to trading activities or practices involving ISE's own marketplace; 
registration pursuant to its unique rules (i.e., registration rules 
that are not Common Rules); its duties as a Designated Examining 
Authority pursuant to Rule 17d-1 under the Act; and any rules that are 
not substantially similar to the rules of FINRA, except for ISE rules 
for any ISE member that acts as an inbound router for ISE and is a 
member of both ISE and FINRA (``Inbound Router Member'').\14\ For 
purposes of the proposed 17d-2 Plan, Ballista would meet the definition 
of the term ``Inbound Router Member'' as it is used in the plan.\14a\ 
The effect of these provisions is that regulatory oversight and 
enforcement responsibilities for Ballista would be vested with FINRA. 
These provisions should help avoid any potential conflicts of interest 
that could arise if ISE was primarily responsible for regulating 
Ballista, with which ISE is affiliated.
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    \14\ Apparent violations of such ISE rules by any Inbound Router 
Member will be processed by, and enforcement proceedings will be 
conducted by, FINRA.
    \14a\ ISE's other Inbound Router Member, Direct Edge ECN LLC, is 
not addressed by this 17d-2 Plan, but is instead addressed in a 
similar manner under a separate, stand-alone plan. See Securities 
Exchange Act Release No. 59134 (December 22, 2008), 73 FR 79943 
(December 30, 2008) (File No. 4-574) (order declaring effective the 
17d-2 plan concerning Direct Edge ECN LLC).
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IV. Conclusion

    This Order gives effect to the Plan filed with the Commission in 
File No. 4-596. 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. 4-596, 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. 4-596.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(34).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-10596 Filed 5-5-10; 8:45 am]
BILLING CODE 8011-01-P