Document ID: SEC-2006-0906-0001
Agency: sec
Document Type: Notice
Title: Securities: Regulatory responsibilities allocation
Posted Date: 2006-07-18T04:00Z

[Federal Register: July 18, 2006 (Volume 71, Number 137)]
[Notices]               
[Page 40759-40760]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr18jy06-88]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54136; File No. 4-517]

 
Program for Allocation of Regulatory Responsibilities Pursuant to 
Rule 17d-2; Order Granting Approval of Plan for Allocation of 
Regulatory Responsibilities Between The NASDAQ Stock Market LLC and the 
National Association of Securities Dealers, Inc.

July 12, 2006.
    Notice is hereby given that the Securities and Exchange Commission 
(``SEC'' or ``Commission'') has issued an Order, pursuant to Sections 
17(d) \1\ and 11A(a)(3)(B) \2\ of the Securities Exchange of 1934 
(``Act''), granting approval and declaring effective a plan for 
allocating regulatory responsibility filed pursuant to Rule 17d-2 of 
the Act,\3\ by The NASDAQ Stock Market LLC (``Nasdaq'') and the 
National Association of Securities Dealers, Inc. (``NASD'').
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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, NASD 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, Nasdaq is relieved of 
those regulatory responsibilities allocated to NASD.\4\
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    \4\ On January 13, 2006, the Commission approved Nasdaq's 
application for registration as a national securities exchange. The 
Commission conditioned the operation of the Nasdaq Exchange upon 
satisfaction of several requirements, one of which was the approval 
by the Commission of an agreement pursuant to Rule 17d-2 between 
Nasdaq and NASD. Securities Exchange Act Release No. 53128, 71 FR 
3550 (January 23, 2006). Commission approval of this plan allocating 
regulatory responsibility satisfies this requirement.
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I. Introduction

    Section 19(g)(1) of the Act,\5\ among other things, requires every 
national securities exchange and registered securities association 
(``SRO'') 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) or 19(g)(2) 
of the Act.\6\ Section 17(d)(1) 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.\7\ With respect to common members of two or more SROs, 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) and 15 U.S.C. 78s(g)(2).
    \7\ Securities Acts 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\8\ and Rule 17d-2 under the Act.\9\ Rule 17d-2 under the Act 
permits SROs to propose joint plans allocating regulatory 
responsibilities, other than financial responsibility rules, with 
respect to 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 self-regulatory 
organizations, to remove impediments to and foster the development of a 
national market system and a national clearance and settlement system, 
and 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, any 
self-regulatory organization is relieved of those regulatory 
responsibilities for common members that are allocated by the plan to 
another self-regulatory organization.
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    \8\ 17 CFR 240.17d-1. Rule 17d-1 authorizes the Commission to 
designate a single SRO as the designated examining authority 
(``DEA'') to examine common members for compliance with financial 
responsibility requirements imposed by the Act, the rules 
thereunder, and SRO rules.
    \9\ 17 CFR 240.17d-2.
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    On April 17, 2006, the Commission published notice of the filing by 
Nasdaq and NASD of a joint plan allocating regulatory responsibility 
for common members.\10\ No comments were received. On July 12, 2006, 
Nasdaq and NASD filed an amended joint plan for

[[Page 40760]]

allocating regulatory responsibility.\11\ The plan, as amended, is 
intended to reduce regulatory duplication for firms that are common 
members of Nasdaq and NASD. Included in the plan is an attachment 
(``The Nasdaq Stock Market LLC Rules Certification for 17d-2 Agreement 
with NASD'' referred to herein as the ``Nasdaq Certification'') that 
clearly delineates regulatory responsibilities with respect to 
specified Nasdaq rules and specified federal securities laws. The 
Nasdaq Certification lists every Nasdaq rule that is identical or 
substantially similar to a NASD rule for which, under the plan, the 
NASD would bear responsibility for examining, and enforcing compliance 
by, common members. The Nasdaq Certification also includes the federal 
securities laws for which, under the plan, the NASD would bear 
responsibility for examining, and enforcing compliance by, common 
members.
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    \10\ Securities Exchange Act Release No. 53628 (April 10, 2006), 
71 FR 19763.
    \11\ Nasdaq and NASD made clarifying changes in the amended 
plan, and included a list of the federal securities laws, and the 
rules and regulations thereunder, in the Nasdaq Certification for 
which, under the plan, the NASD would bear responsibility for 
examining, and enforcing compliance by, common members. These 
changes are non-substantive, and therefore the Commission is not 
seeking comment on the amended joint plan.
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II. Discussion

    The Commission finds that the proposed plan is consistent with the 
factors set forth in Section 17(d) of the Act and Rule 17d-2(c) \12\ in 
that the proposed plan is necessary or appropriate in the public 
interest and for the protection of investors, fosters cooperation and 
coordination among self-regulatory organizations, and removes 
impediments to and fosters the development of the national market 
system. In particular, the Commission believes that the proposed plan 
could reduce unnecessary regulatory duplication by allocating to the 
NASD certain responsibilities for common members that would otherwise 
be performed by both Nasdaq and NASD. The proposed plan promotes 
efficiency by reducing costs to common members. Furthermore, because 
Nasdaq and NASD will coordinate their regulatory functions in 
accordance with the plan, the plan should promote investor protection.
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    \12\ 15 U.S.C. 78q(d) and 17 CFR 240.17d-2(c).
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    The Commission notes that Nasdaq and NASD have allocated regulatory 
responsibility for all Nasdaq rules that are identical or substantially 
similar to NASD rules, as set forth in the Nasdaq Certification.\13\ 
According to the plan, Nasdaq and NASD will undergo an annual review of 
the Nasdaq Certification to add Nasdaq rules that are identical or 
substantially similar to NASD rules; delete Nasdaq rules that are no 
longer identical or substantially similar to NASD rules; and confirm 
that the remaining rules on the Nasdaq Certification continue to be 
Nasdaq rules that are identical or substantially similar to NASD rules. 
The Commission today is declaring effective and approving a plan that 
allocates regulatory responsibility to NASD for the oversight and 
enforcement of all Nasdaq rules that are identical or substantially 
similar to the rules of the NASD for common members of Nasdaq and NASD. 
Therefore, modifications to the Nasdaq 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 
Nasdaq rules in the Nasdaq Certification that are identical or 
substantially similar to NASD rules. However, should Nasdaq or NASD 
decide to add a Nasdaq rule to the Nasdaq Certification that is not 
identical or substantially similar to an NASD rule, or delete a Nasdaq 
rule from the Nasdaq Certification that is identical or substantially 
similar to an NASD rule, or leave on the Nasdaq Certification a Nasdaq 
rule that is no longer identical or substantially similar to an NASD 
rule, such a change would be an amendment to the plan which must be 
filed with the Commission pursuant to Rule 17d-2 under the Act.
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    \13\ Nasdaq has represented that there are no Nasdaq rules that 
are identical or substantially similar to NASD rules that are not 
included in the Nasdaq Certification. Telephone call between Jeffrey 
Davis, Nasdaq Office of General Counsel, and Rebekah Liu, Special 
Counsel, Division of Market Regulation, Commission, on June 19, 
2006.
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    Nasdaq and NASD have also set forth the federal securities laws, 
and the rules and regulations thereunder, in the Nasdaq Certification 
for which, under the plan, NASD will bear responsibility for examining, 
and enforcing compliance by, common members. The Commission notes that 
any changes to this list of federal securities laws, and the rules and 
regulations thereunder, would be an amendment to the plan between 
Nasdaq and NASD and therefore must be filed with the Commission 
pursuant to Rule 17d-2 under the Act.
    The plan further provides that NASD shall not assume regulatory 
responsibility, and Nasdaq will retain full responsibility, for 
surveillance and enforcement of trading activities or practices solely 
involving Nasdaq's own marketplace.
    The plan also permits Nasdaq and NASD to terminate the plan for 
various reasons, including the non-payment of fees, for cause, and for 
convenience. The Commission notes, however, that while the plan permits 
the parties to terminate the plan, the allocation to NASD of the 
regulatory responsibilities set forth in the plan cannot be reallocated 
by the parties themselves under the terms of the plan. Rule 17d-2 
requires that any allocation or re-allocation of regulatory 
responsibilities be filed with the Commission pursuant to Rule 17d-2.

III. Conclusion

    This Order gives effect to the plan filed with the Commission in 
File No. 4-517. The parties to the plan 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) and 
11A(a)(3)(B) of the Act, that the plan, in File No. 4-517, between 
Nasdaq and NASD filed pursuant to Rule 17d-2 is approved and declared 
effective.
    It is therefore ordered that Nasdaq is relieved of those 
responsibilities allocated to NASD under the plan in File No. 4-517.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
Nancy M. Morris,
Secretary.
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    \14\ 17 CFR 200.30-3(a)(34).
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 [FR Doc. E6-11327 Filed 7-17-06; 8:45 am]

BILLING CODE 8010-01-P