Document ID: SEC-2015-1010-0001
Agency: sec
Document Type: Notice
Title: Orders: Automated Matching Systems Exchange, LLC
Posted Date: 2015-06-17T04:00Z

[Federal Register Volume 80, Number 116 (Wednesday, June 17, 2015)]
[Notices]
[Pages 34765-34770]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-14807]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-75157; File No. 10-214]

Automated Matching Systems Exchange, LLC; Order Denying an 
Application for a Limited Volume Exemption From Registration as a 
National Securities Exchange Under Section 5 of the Securities Exchange 
Act of 1934

June 11, 2015.

I. Introduction

    Automated Matching Systems Exchange, LLC (``AMSE'') believes that 
its proposed business model would qualify it as an exchange. As defined 
in Section 3(a)(1) of the Securities Exchange Act of 1934 (``Exchange 
Act'' or ``Act''), an ``exchange'' is ``any organization, association, 
or group of persons, whether incorporated or unincorporated, which 
constitutes, maintains, or provides a market place or facilities for 
bringing together purchasers and sellers of securities or for otherwise 
performing with respect to securities the functions commonly performed 
by a stock exchange as that term is generally understood, and includes 
the market place and the market facilities maintained by such 
exchange.'' \1\ Under Section 5 of the Act, it is unlawful for an 
exchange to effect any transaction in a security, or to report such 
transaction, ``unless such exchange (1) is registered as a national 
securities exchange . . . or (2) is exempted from such registration 
upon application by the exchange because, in the opinion of the 
Commission, by reason of the limited volume of transactions effected on 
such exchange, it is not practicable and not necessary or appropriate 
in the public interest or for the protection of investors to require 
such registration.'' \2\
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    \1\ 15 U.S.C. 78c(a)(1). Rule 3b-16 under the Act further 
provides that an organization, association, or group of persons 
shall be considered to constitute, maintain, or provide `a market 
place or facilities for bringing together purchasers and sellers of 
securities or for otherwise performing with respect to securities 
the functions commonly performed by a stock exchange,' as those 
terms are used in Section 3(a)(1) of the Act, (15 U.S.C. 78c(a)(1)), 
if such organization, association, or group of persons: (1) Brings 
together the orders for securities of multiple buyers and sellers; 
and (2) Uses established, non-discretionary methods (whether by 
providing a trading facility or by setting rules) under which such 
orders interact with each other, and the buyers and sellers entering 
such orders agree to the terms of a trade. 17 CFR 240.3b-16(a).
    \2\ 15 U.S.C. 78e.
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    AMSE has chosen the latter option, seeking from the Commission an 
exemption from registration as a national securities exchange.\3\ After 
a careful review of the exemption application, however, we have 
determined to deny it.
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    \3\ We note that, in a December 2014 public notice, the 
Commission expressly stated that it understood AMSE to be seeking an 
exemption under Section 5--not registration--and that AMSE did not 
respond otherwise. See Securities Exchange Act Release No. 73911 
(December 22, 2014), 79 FR 78507, note 1 (December 30, 2014) 
(``Amendment Notice'') (``The Commission notes that AMSE's 
application only seeks a limited volume exemption under Section 5 of 
the Exchange Act from registration as a national securities exchange 
under Section 6 of the Exchange Act. AMSE's application does not 
seek to register as a national securities exchange.''). We therefore 
deem any claim to the contrary waived.
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    Although our review leads us to identify a number of potential 
issues that might warrant this result (including whether AMSE would 
even qualify as an exchange),\4\ we find that the application is 
fatally flawed because AMSE is proposing to possess the broad 
regulatory powers and responsibilities that are reserved for self-
regulatory organizations (``SROs''), while simultaneously seeking 
exemption from registration as an exchange.\5\ Under the Act, for an 
exchange to possess the powers and responsibilities of an SRO, it must 
register as a national securities exchange. An exchange that is exempt 
from such registration does not meet the definition of an SRO under the 
Act. Moreover, the Commission has never allowed an exempt exchange to 
possess the broad range of regulatory powers and responsibilities of an 
SRO. We believe that doing so here would be contrary to the Act and 
inconsistent with the public interest and the protection of investors.
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    \4\ See infra Section III.A.
    \5\ SROs are privately-funded entities, entrusted with quasi-
governmental authority, which generally adopt rules to govern their 
members and enforce these rules as well as the federal securities 
laws. See generally Free Enterprise Fund v. Public Co. Accounting 
Oversight Bd., 561 U.S. 477, 484 (2010) (explaining that ``private 
self-regulatory organizations in the securities industry--such as 
the New York Stock Exchange--. . . investigate and discipline their 
own members subject to Commission oversight''). The quasi-
governmental authority afforded to SROs includes prosecutorial, 
adjudicatory, and rulemaking authority.
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II. Background

A. Procedural History

    On July 7, 2014, AMSE filed with the Commission an application 
seeking a limited volume exemption, under Section 5 of the Act, from 
the requirement to register as a national securities exchange under 
Section 6 of the Act.\6\ Notice of AMSE's exemption application was 
published for comment in the Federal Register on July 29, 2014.\7\
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    \6\ In the interest of completeness, we note the events that 
preceded AMSE's filing of its July 7th application. From December 
2013 through March 2014, staff had numerous communications with AMSE 
about its (then-draft) application, including multiple email 
exchanges and at least one phone call; during these exchanges, the 
staff explained that it was concerned that AMSE's proposed business 
model was not an ``exchange.'' In March 2014, AMSE formally 
submitted a Form 1 application. On April 24, 2014, the staff 
returned AMSE's application because, based on its review, the staff 
believed that AMSE had erred in submitting an application for an 
exchange and instead should have submitted an application for a 
national securities association, a classification that the staff 
believed better fit with AMSE's proposed business model. On May 6, 
2014, the staff had a phone call with AMSE in which the staff again 
explained its view that AMSE's proposed business model was not an 
exchange. On June 16, 2014, AMSE brought suit against the Commission 
in the U.S. District Court for the District of South Dakota seeking 
certain injunctive and declaratory relief in connection with its 
application. See AMSE v. SEC, Civ. 14-4095 (D.S.D.). On June 24, 
2014, the Commission staff and AMSE reached an agreement pursuant to 
which AMSE would submit a new Form 1 application that would include 
certain additional information needed to complete the application 
and the staff would thereafter proceed to process the revised 
application for Commission consideration.
    \7\ See Securities Exchange Act Release No. 72661 (July 23, 
2014), 79 FR 44070.
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    On October 23, 2014, the Commission issued an order instituting 
proceedings to determine whether to grant or deny AMSE's exemption 
application.\8\ In that order, the Commission explained that it ``is 
concerned that AMSE's exemption application does not meet a key 
threshold requirement for being granted an exemption from exchange 
registration--namely, that the applicant actually be an `exchange' as 
defined under Section 3(a)(1) of the Exchange Act and Rule 3b-16 
thereunder.'' \9\ The Commission specifically identified the fact that 
``it does not appear that any AMSE system would operate as an exchange 
by bringing together purchasers and sellers of securities.'' \10\
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    \8\ See Securities Exchange Act Release No. 73419, 79 FR 64421 
(October 29, 2014) (``Order Instituting Proceedings'').
    \9\ Id. at 64422.
    \10\ Id.

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[[Page 34766]]

    On November 10, 2014, AMSE submitted Amendment No. 1 to its 
exemption application. Notice of Amendment No. 1 to AMSE's exemption 
application was published for comment in the Federal Register on 
December 30, 2014.\11\ In the notice, the Commission advised interested 
parties that it was considering potential ``additional grounds for 
denial.'' As the Commission explained, ``AMSE's exemption application 
states that AMSE would operate as a self-regulatory organization that 
would exercise self-regulatory authority over its members,'' \12\ but 
under the Act an exempt exchange is not an SRO; thus, ``any attempts by 
AMSE to hold itself out as a self-regulatory organization while 
simultaneously seeking an exemption under Section 5 would be contrary 
to the Exchange Act.'' \13\
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    \11\ See Amendment Notice, supra note 3. In Amendment No. 1, 
AMSE added language to Exhibit E that described proposed 
consolidated quotation systems and a proposed optional order router 
that could send orders between the distinct member-operated order 
books.
    \12\ 79 FR at 78508.
    \13\ Id. On January 22, 2015, the Commission provided notice of 
an extension of the time for the conclusion of the proceedings to 
determine whether to grant or deny AMSE's exemption application. See 
Securities Exchange Act Release No. 74116 (January 22, 2015), 80 FR 
4321 (January 27, 2015) (``Extension Notice''). The Extension Notice 
extended the time for the conclusion of the proceedings by 90 days, 
to April 24, 2015. Id. AMSE subsequently consented to an additional 
60-day extension of the time for the conclusion of the proceedings 
to June 23, 2015. See Letter from Michael Stegawski, Chief 
Regulatory Officer, AMSE, to SEC staff, dated February 27, 2015 
(``AMSE February 27 Letter'').
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    On February 11, 2015, AMSE submitted Amendment Nos. 2A and 2B, 
along with a comment letter.\14\ Among other things, Amendments 2A and 
2B changed most of the application's references to ``self-regulatory 
organization'' to ``limited volume exempt regulatory organization.'' 
\15\ Notwithstanding this change in nomenclature, AMSE did not 
otherwise modify the accompanying description of the powers and 
responsibilities it contemplated possessing. In some instances, AMSE 
continued to refer to itself in terms that pertain only to SROs under 
the Act or implied that it falls generally within the category of an 
SRO and would exercise authority as such.\16\
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    \14\ See Letter from Michael Stegawski, Chief Regulatory 
Officer, AMSE, to SEC staff, dated February 8, 2015 (``AMSE February 
8 Letter''). Attached to the AMSE February 8 Letter were five 
exhibits: Exhibit A--Amendment to Form 1 Application 2A, February 
16, 2015 (``Amendment 2A''); Exhibit B--Amendment to Form 1 
Application 2B, February 16, 2015 (``Amendment 2B''); Exhibit C--
January 16, 2015 Correspondence--Paul G. Alvarez; Exhibit D--January 
5, 2015 Correspondence--Michael Stegawski (``AMSE January 5 
Letter''); Exhibit E--Discussion Draft--Form 1 Application, January 
5, 2015.
    \15\ See AMSE February 8 Letter. We note that Amendment Nos. 2A 
and 2B appear to present different business models. We find it 
unnecessary to analyze these proposed alternatives separately, 
however, because both involve the same fatal flaw concerning AMSE's 
proposal to exercise the panoply of self-regulatory powers and 
responsibilities. Further, we note that neither the Act, nor Form 1, 
nor the rules relating thereto provide for amendments in the 
alternative.
    \16\ See infra notes 23-30 and accompanying text.
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    The Commission received thereafter one comment letter from 1st 
Trade opposing AMSE's exemption application,\17\ to which AMSE 
subsequently submitted a response.\18\
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    \17\ See Letter from Lori C. Sarian, Managing Partner, 1st 
Trade, to Kevin M. O'Neill, Deputy Secretary, Commission, dated 
April 14, 2015 (``1st Trade Letter''). This comment letter expresses 
concerns about an overall lack of clarity and detail in AMSE's 
application. This comment letter also raises concerns with respect 
to specific aspects of AMSE's application, citing, among other 
things, an ambiguity and vagueness surrounding membership 
qualifications and obligations, an unclear application process for 
certain potential members, proposed best execution obligations that 
may be inconsistent with industry standards, an inadequate 
description of operations and trade processing, inadequate issuer 
requirements, and the duplication of requirements for potential 
members who are already broker-dealers. Because the Commission's 
focus in this order is on threshold matters with respect to AMSE's 
application, many of 1st Trade's specific concerns are not addressed 
herein.
    \18\ See Letter from Michael Stegawski, Chief Regulatory 
Officer, AMSE, to Kevin M. O'Neill, Deputy Secretary, Commission, 
dated April 22, 2015 (``AMSE Response Letter''). The AMSE Response 
Letter provides responses to each of 1st Trade's specific comments. 
See supra note 17.
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B. AMSE's Proposed Regulatory Functions

    In its exemption application, AMSE proposes that it would operate a 
marketplace for securities processing.\19\ According to the 
application, persons seeking to buy or sell securities could only enter 
their orders through an AMSE member.\20\ And pursuant to AMSE's 
proposed rules, any person may become a member of AMSE, provided that 
the person submits an application and complies with any conditions 
imposed by AMSE.\21\ AMSE proposes a specific application form for 
broker-dealer firms to become its members.\22\
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    \19\ See Amendment 2B, Exhibit E, Section A.
    \20\ See Amendment 2B, Exhibit E, Section E. The definition of 
``participant'' was added to the AMSE rules in Amendment 2B. 
Participant means ``a Person who has entered into a contractual 
agreement with an Exchange Member for the purpose of effecting 
transactions in securities or submitting, disseminating, or 
displaying orders.'' See AMSE Rule 1.5(w). In addition, Amendment 2B 
replaced the term ``customer'' with ``participant'' throughout 
AMSE's rules and other Form 1 Exhibits. See, e.g., AMSE Rules 
Chapters III, IV, VI, VII, XI, and Amendment 2B, Exhibit E.
    \21\ See AMSE Rule 2.3. Amendment 2B removed the requirement 
that AMSE members be registered broker-dealers. See Amendment No. 1, 
AMSE Rule 2.3. In addition, Amendment 2B removed the requirement 
that AMSE members comply with Regulation ATS. See Amendment No. 1, 
Rules 15.1 -15.5.
    \22\ See Amendment 2B, Exhibit F and Rule 2.6(b).
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    Although AMSE's application seeks approval as an exempt exchange, 
its proposal reveals AMSE's aim to exist simultaneously as an SRO. 
Throughout its exemption application, AMSE refers to itself in terms 
that pertain only to SROs under the Act. For example, AMSE's exemption 
application refers to AMSE's rules being filed with the Commission 
under Section 19(b) of the Act,\23\ which governs the filing of rules 
by SROs with the Commission.\24\ AMSE's rules also state that its 
disciplinary decisions and access decisions would be subject to agency 
review under the Act,\25\ where such review is available only for the 
activities of SROs under Section 19 of the Act.\26\ AMSE's exemption 
application also repeatedly implies that it falls generally within the 
category of an SRO and that it would exercise authority as such.\27\ 
AMSE also has stated in a comment letter that AMSE ``will become a 
dedicated SRO for securities matching systems. . . .'' \28\ Further, 
AMSE asserts that its members would hold a status under the Act that is 
only conferred on members of SROs.\29\
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    \23\ See AMSE Rule 1.5(b).
    \24\ See 15 U.S.C. 78s(b).
    \25\ See AMSE Rules 8.14 and 9.7.
    \26\ See 15 U.S.C. 78s(b), (d).
    \27\ See, e.g., AMSE Rule 1.5(j) (``a self-regulatory 
organization, other than the Exchange . . .'') and AMSE Rule 12.5 
(``The Exchange may enter into one or more agreements with another 
self-regulatory organization to provide regulatory services to the 
Exchange to assist the Exchange in discharging its obligations under 
Section 6 and Section 19(g) of the Act. . . .Notwithstanding the 
fact that the Exchange may enter into one or more regulatory 
services agreements, the Exchange shall retain ultimate legal 
responsibility for, and control of, its self-regulatory 
responsibilities . . .'').
    \28\ See AMSE Response Letter at 10; see also id. at 9 (AMSE 
states that it ``will exercise self-regulatory powers.'').
    \29\ See AMSE Rule 1.5(l) (``An Exchange Member shall have the 
status as provided in Section 3(a)(3) of the Act or, where 
applicable, a Person operating pursuant to an exemption from 
registration under the Act''). Section 3(a)(3) of the Act defines 
``member'' exclusively within the context of either a national 
securities exchange or a national securities association, which are 
self-regulatory organizations. See 15 U.S.C. 78c(a)(3), (26).
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    In addition, throughout its exemption application, AMSE proposes to 
perform regulatory oversight of its members that is consistent with the 
powers and responsibilities of an SRO.\30\

[[Page 34767]]

Specifically, AMSE proposes to regulate its members with respect to: 
training, experience, and competence; \31\ financial responsibility and 
operational capacity; \32\ the maintenance of books and records; \33\ 
business conduct; \34\ anti-money laundering compliance programs; \35\ 
extension of margin or credit; \36\ custody of customer funds or 
securities; \37\ fraud and manipulation; \38\ and compliance with 
broker best execution obligations.\39\ AMSE also proposes to regulate 
the associated persons of its members and would require each member to 
establish, maintain, and enforce written supervisory procedures to 
enable the member to supervise the activities of its associated persons 
and to ensure their compliance with the securities laws, rules, 
regulations and statements of policy promulgated thereunder, as well as 
with AMSE rules.\40\ Moreover, at times AMSE asserts that it is 
required to perform such functions under the Act,\41\ implying that it 
will be an SRO, or acting in an equivalent, self-designated capacity it 
calls a ``limited volume exempt regulatory organization.'' \42\ As the 
1st Trade Letter observed, AMSE appears to be ``attempting to operate 
with the most lenient regulatory constraints possible and in this 
attempt are circumventing many accepted practices and regulatory 
requirements.'' \43\
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    \30\ SROs' wide-ranging responsibilities generally involve 
rulemaking, examining member firms for compliance with those rules 
and the securities laws (including the Commission's rules 
thereunder), taking disciplinary action against members that fail to 
comply, and market monitoring, as well as professional activities 
such as testing, training, and licensing. See, e.g., 15 U.S.C. 
78f(b)(1) (requiring a national securities exchange to be so 
organized and have the capacity to enforce compliance by its members 
and associated persons with the Exchange Act, the rules and 
regulations thereunder, and the rules of the exchange); 15 U.S.C. 
78o-3(b)(2) (requiring the same of registered securities 
associations); 15 U.S.C. 78f(b)(2)-(10) (specifying requirements for 
the rules of a national securities exchange, including with respect 
to preventing fraudulent acts and practices, and with the discipline 
of members); 15 U.S.C. 78o-3(b)(3)-(15) (specifying requirements for 
rules of a registered securities association, including with respect 
to preventing fraudulent acts and practices, and with the discipline 
of members); 15 U.S.C. 78o-3(g)(3)(B) (providing that a registered 
securities association may bar natural persons from association with 
a member if the person does not meet standards of training, 
experience, and competence prescribed by rules of the association); 
and 15 U.S.C. 78q(d) (providing for allocation of examination 
authority across self-regulatory organizations).
    \31\ See AMSE Rule 2.4(b).
    \32\ See AMSE Rule 2.4(c)(1).
    \33\ See AMSE Rules 2.4(c)(2) and 4.1-4.4.
    \34\ See AMSE Rules 3.1-3.14.
    \35\ See AMSE Rule 5.6.
    \36\ See AMSE Rule 6.1.
    \37\ See AMSE Rule 10.12.
    \38\ See AMSE Rules 11.1-11.4.
    \39\ See AMSE Rule 11.8.
    \40\ See AMSE Rule 5.1; see also AMSE Rules 5.2-5.5.
    \41\ See, e.g., AMSE February 8 Letter at 5 (stating ``AMSE has 
expressly elected not to register as a broker-dealer and comply with 
the provisions of Regulation ATS and therefore is required to 
exercise self-regulatory powers.''); and AMSE Rule 12.5 (``The 
Exchange may enter into one or more agreements with another self-
regulatory organization to provide regulatory services to the 
Exchange to assist the Exchange in discharging its obligations under 
Section 6 and Section 19(g) of the Act . . .''). Section 6 of the 
Act imposes regulatory obligations on national securities exchanges, 
which are self-regulatory organizations; Section 19(g) of the Act 
imposes obligations on self-regulatory organizations. See 15 U.S.C. 
78f and 78s(g); see also 15 U.S.C. 78c(26) (defining self-regulatory 
organization to include registered national securities exchange, 
national securities associations, and clearing agencies).
    \42\ The term ``limited volume exempt regulatory organization'' 
is not a recognized term under the Act. AMSE created this defined 
term in its rules. See AMSE Rule 1.5(ee) (```LVERO' means an entity 
exercising self-regulatory powers pursuant to an exemption from 
registration under the Act''). As noted above, prior to submitting 
Amendments 2A and 2B, AMSE had referred to itself as an SRO; AMSE 
replaced many of these references with ``limited volume exempt 
regulatory organization'' after the Commission explained in December 
2014 its preliminary view that AMSE would not qualify as an SRO. 
Critically, AMSE did not accompany this nomenclature change with any 
meaningfully limitations on the powers and responsibilities that it 
proposed to exercise.
    \43\ 1st Trade Letter at 3.
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    AMSE also proposes to require its members and their associated 
persons to agree to be regulated by AMSE and to recognize AMSE as being 
obligated to enforce their compliance with the Act and regulations 
thereunder.\44\ AMSE also would require its members and associated 
persons to recognize AMSE as being required to discipline them for 
violations of the Act, including through: expulsion; suspension; 
limitation of activities, functions, and operation; fines; censure; 
suspension or bar from association with an AMSE member; or any other 
sanction determined in AMSE's discretion for violations of the Act.\45\ 
Here again, these are powers and responsibilities exercised by an 
SRO.\46\
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    \44\ See AMSE Rules 2.2 and 2.5(e).
    \45\ See AMSE Rule 2.2. AMSE's rules quote the language in the 
Act that gives national securities exchanges and national securities 
associations the authority to enforce compliance by their members 
with the Act. See 15 U.S.C. 78f(b)(6) and 78o-3(b)(7).
    \46\ See infra Section III.B.
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III. Discussion

A. AMSE Does Not Appear to Meet the Definition of an ``Exchange.''

    At the outset, we note that AMSE has urged the Commission to 
conclude that AMSE should be granted an exemption from exchange 
registration under the Act. Certain provisions of AMSE's amended 
application indicate that AMSE's members may operate multiple distinct 
trading systems, under an AMSE umbrella, while other provisions 
indicate that AMSE itself would operate the proposed trading 
systems.\47\
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    \47\ Compare AMSE Rule 11.8 (referring to participant orders 
being executed ``on a designated trading platform, including that of 
a trading system operated by the Exchange Member''); and Amendment 
2B, Exhibit E, Section D (requiring AMSE members to be responsible 
for having procedures for safeguarding their systems); with 
Amendment 2B, Exhibit E, Section A (``the Exchange will operate one 
or more fully automated electronic order books''); id. at Section E 
(``[o]rders of Participants shall be ranked and maintained in the 
Exchange's electronic books for orders''); and id. at Section F 
(``[o]rders shall be matched for execution . . . on the Exchange's 
electronic order book'').
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    These conflicting provisions make it difficult to ascertain the 
operation of the trading system. Moreover, the lack of detail and 
clarity in AMSE's exemption application prevents the Commission from 
understanding precisely how AMSE proposes to bring together the orders 
of multiple buyers and sellers and otherwise satisfy the definition of 
``exchange.'' Under these circumstances, we would have grave doubts as 
to whether AMSE could in fact qualify as an exchange exempt from 
registration under the Act. We need not reach the merits of this issue, 
however, because as we describe below AMSE's exemption application 
suffers from a separate, fatal flaw.

B. It Is Contrary to the Act and Inconsistent With the Public Interest 
and the Protection of Investors for an Exempt Exchange To Exercise the 
Powers and Responsibilities of an SRO

    Even assuming that AMSE were deemed to be an exchange, the 
Commission cannot find that AMSE should be granted an exemption from 
the requirement to register as a national securities exchange under 
Section 6 of the Act because the Commission believes that AMSE's 
proposal is inconsistent with the Act.\48\ As described above, AMSE 
proposes to exercise extensive self-regulatory powers that are reserved 
under the Act for an SRO--indeed, the bulk of AMSE's rules are devoted 
to this proposed regulatory function, and at times AMSE even refers to 
itself as an SRO. But the Act does not afford the powers and 
responsibilities of an SRO to an exchange that is exempt from 
registration, nor does it require an exchange that is exempt from 
registration to exercise such powers and responsibilities.\49\
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    \48\ For a history of the formation and regulation of stock 
exchanges, see generally Concept Release Concerning Self-Regulation, 
Securities Exchange Act Release No. 50700 (November 18, 2004), 69 FR 
71256, at 71257-58 (December 8, 2004); Charles R. Geisst, Wall 
Street: A History (1997); Michael E. Parrish, Securities Regulation 
and the New Deal (1970); Joel Seligman, The Transformation of Wall 
Street: A History of the Securities and Exchange Commission and 
Modern Corporate Finance (3d ed. 2003).
    \49\ See supra note 42 and accompanying text.
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    Section 3(a)(26) of the Act defines an SRO, in pertinent part, as 
any ``national

[[Page 34768]]

securities exchange.'' \50\ An entity may only become a ``national 
securities exchange'' by registering under Section 6(a) of the Act, 
\51\ as the Commission has previously explained.\52\ And, although 
Section 5 of the Act permits an exempt exchange to operate lawfully 
without registering as a national securities exchange,\53\ an exempt 
exchange is, by definition, not a national securities exchange,\54\ 
and, thus, does not fall within the definition of ``self-regulatory 
organization'' under the Act. It necessarily follows that, were we to 
grant AMSE the exemption it seeks, AMSE would not be entitled, much 
less required by the Act, to hold itself out as an SRO or to exercise 
the self-regulatory authority that is statutorily afforded to SROs.
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    \50\ 15 U.S.C. 78c(a)(26) (defining SRO as ``any national 
securities exchange, registered securities association, or 
registered clearing agency''). See generally Barbara v. New York 
Stock Exchange, Inc., 99 F.3d 49, 51 (2d Cir. 1996) (explaining that 
``[u]nder the Act, [a national securities exchange] `is a self-
regulatory organization''').
    \51\ ``An exchange may be registered as a national securities 
exchange under the terms and conditions hereinafter provided in this 
section and in accordance with the provisions of section 19(a) of 
this title, by filing with the Commission an application for 
registration. . . .'' 15 U.S.C. 78f(a).
    \52\ In a previous order granting an exemption from registration 
under Section 5 of the Act, the Commission stated that ``[b]y virtue 
of this exemption from registration, the Wunsch System falls outside 
the definition of a national securities exchange because the term 
`national securities exchange' implies a registered entity (see, 
e.g., sections 3(a)(26) of the Act (defining the term `self-
regulatory organization') and section 6(a) of the Act.''). See 
Securities Exchange Act Release No. 28899 (February 20, 1991), 56 FR 
8377, 8382 note 51 (February 28, 1991).
    \53\ To grant an exemption from the requirement to register as a 
national securities exchange, the Commission must conclude that, in 
the opinion of the Commission, by reason of the limited volume of 
transactions effected on such exchange, it is not practicable and 
not necessary or appropriate in the public interest or for the 
protection of investors to require registration. 15 U.S.C. 78e.
    \54\ It is self-evident that an exchange cannot be exempt, under 
Section 5, from registering as a national securities exchange under 
Section 6, while simultaneously existing as a national securities 
exchange under Section 6.
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    Nevertheless, there remains the question whether, in our 
discretion, we could allow AMSE to exercise the powers and 
responsibilities of an SRO, notwithstanding the fact that AMSE, as an 
exempt exchange, would not meet the definition of an SRO. Although the 
statutory language does not unambiguously forbid such a result, we 
conclude that we lack the authority under the Act to permit an exempt 
exchange to exercise the powers and responsibilities reserved for an 
SRO. In our view, the Act reflects a deliberate balance between, on the 
one hand, granting SROs the broad, quasi-governmental authority that 
AMSE proposes to exercise, and, on the other hand, ensuring that an 
SRO's exercise of this authority is carefully checked by close 
Commission oversight.\55\ Indeed, we believe this understanding is 
further supported by a primary Congressional purpose underlying the 
1975 amendments to the Act,\56\ through which ``Congress specifically 
and importantly modified [the system of self-regulation in the 
securities industry] to enhance the SEC's oversight of self-regulatory 
organizations.'' \57\ As the Senate Report accompanying the 1975 
amendments explained, ``[t]he SEC is charged with supervising the 
exercise of this self-regulatory power in order to assure that it is 
used effectively to fulfill the responsibilities assigned to the self-
regulatory agencies, and that it is not used in a manner inimical to 
the public interest or unfair to private interests.'' \58\
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    \55\ See, e.g., In re Series 7 Broker Qualification Exam Scoring 
Litig., 548 F.3d 110, 112, 114 (D.C. Cir. 2008) (explaining that 
``[t]he Exchange Act reveals a deliberate and careful design for 
regulation of the securities industry'' that ``depends on the SEC's 
delegation of certain governmental functions to private SROs'' and 
describing how this ``delegation involves close oversight'' by the 
Commission). See also S. Rep No. 94-75, at 24 (``self-regulatory 
organizations exercise government power'').
    \56\ Securities Acts Amendments of 1975, P.L. 94-29.
    \57\ NASD v. SEC, 431 F.3d 803, 807 (D.C. Cir. 2005).
    \58\ S. Rep No. 94-75, at 23. See also id. at 22 (explaining 
that the 1975 amendments were intended to ``clarify and strengthen 
the Commission's oversight role with respect to the self-regulatory 
organizations''); id. at 23 (``The self-regulatory organizations 
exercise authority subject to SEC oversight. They have no authority 
to regulate independently of the SEC's control.''); id. (explaining 
that an objective of the 1975 amendments was ``assuring that the 
self-regulatory organizations follow effective and fair procedures, 
that their activities are not anticompetitive and that the 
Commission's oversight powers are ample and its responsibility to 
correct self-regulatory lapses is unmistakable''). See generally 
Onnig H. Dombalagian, Demythologizing the Stock Exchange: 
Reconciling Self-Regulation and the National Market System, 39 U. 
Rich. L. Rev. 1069, 1080 (2005) (``One of the principal changes [of 
the 1975 amendments] to the framework for exchange self-regulation 
was to impose greater limitations on the exercise of rule making and 
disciplinary authority by exchanges.'').
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    Yet were we to allow AMSE to exercise the powers and 
responsibilities of an SRO without actually qualifying as such under 
the Act--i.e., without registering as a national securities exchange--
we would be deprived of many of the means that Congress thought were 
critical for our effective oversight of the exercise of self-regulatory 
powers. By its express terms, the Act affords us such oversight 
authority only over an entity that qualifies as an SRO, which AMSE 
would not have done. Accordingly, if we allowed an exempt exchange to 
exercise the broad powers and responsibilities of an SRO, we would lack 
the authority over that exempt entity that we would normally have 
possessed over SROs to, among other things, ``approve or disapprove the 
proposed rule change[s],'' \59\ ``abrogate, add to, [or] delete from'' 
an exchange rule,\60\ review a final disciplinary sanction imposed by 
the exchange or any denial of access,\61\ ``suspend for a period not 
exceeding twelve months . . . or to censure or impose limitations upon 
the activities, functions, and operations'' of the exchange for 
specified misconduct,\62\ or ``remove from office or censure'' any 
officer or director of the exchange for specified misconduct.\63\ We do 
not believe that such a result would be consistent with the 
Congressional desire, as revealed through the statutory language and 
the legislative history, that the Commission closely oversee the 
exercise of self-regulatory authority.\64\
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    \59\ 15 U.S.C. 78s(b).
    \60\ 15 U.S.C. 78s(c).
    \61\ 15 U.S.C. 78s(d)-(e).
    \62\ 15 U.S.C. 78s(h)(1). See generally S. Rep No. 94-75, at 34 
(explaining that the oversight authorities under Section 19(h)(1) of 
the Act are ``in addition to suspension and deregistration and are 
intended to provide more usable sanctions than the SEC's traditional 
`big stick''').
    \63\ 15 U.S.C. 78s(h)(4).
    \64\ We note that Congress also afforded the Commission 
authority to enlist the assistance of the federal courts in carrying 
out its oversight role. See S. Rep No. 94-75, at 35 (``Sections 
21(e) and 21(f) [of the Exchange Act] would empower the SEC to apply 
to a federal court for an order to (1) enjoin the violation of the 
rules of a self-regulatory organization, (2) command a member of a 
self-regulatory organization to comply with the rules of such 
organization, or (3) command a self-regulatory organization to 
enforce compliance by its members with the Exchange Act, the rules 
thereunder, and the organization's own rules.'').
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    This conclusion is consistent with our prior reading of the Act. As 
the Commission has previously stated, ``any system exercising self-
regulatory powers, such as regulating its members' or subscribers' 
conduct when engaged in activities outside of that trading system, must 
register as an exchange or be operated by a national securities 
association [which is also an SRO under the statutory definition]. This 
is because self-regulatory activities in the securities markets must be 
subject to Commission oversight under Section 19 of the Exchange Act.'' 
\65\ As we have explained, under our view of the Act, ``any system that 
uses its market power to regulate its participants should be regulated 
as an SRO.'' \66\
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    \65\ See Securities Exchange Act Release No. 40760 (December 8, 
1998), 63 FR 70844, 70847 (December 22, 1998) (``Regulation ATS 
Adopting Release'').
    \66\ See Regulation ATS Adopting Release, 63 FR at 70859.

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[[Page 34769]]

    Accordingly, as we read the Act, an exempt exchange is relieved of 
the statutory obligations of a registered SRO but also forfeits the 
ability to exercise the statutory authority of an SRO. To the extent 
that AMSE desires to perform the extensive range of self-regulatory 
responsibilities described in its exemption application, it must 
qualify and register as a national securities exchange (or a national 
securities association).
    In any event, even if we possessed the authority to grant AMSE an 
exemption notwithstanding its intention to exercise the powers and 
responsibilities reserved for SROs, we do not believe that doing so 
would be consistent either with investor protection or the public 
interest. In our view, when an exchange wants to exercise the broad 
powers and responsibilities that AMSE is seeking here, an exemption 
from registration is not appropriate because the Commission would lack 
sufficient oversight mechanisms to ensure that the self-regulatory 
authority is not exercised in a manner inimical to the public interest 
or unfair to private interests. The Commission's oversight 
responsibilities towards SROs has been a cornerstone of self-regulation 
from its inception.\67\ Indeed, due to the potential harm to capital 
formation, investors, and the public interest that could result from 
the misuse of the securities markets, as noted above, Congress 
intentionally created a highly regulated environment in which SROs must 
be subject to close oversight by the Commission. Put simply, an entity 
seeking to establish and enforce a comprehensive regulatory structure 
with respect to the securities business of its broker-dealer members--
including the full range of business conduct, financial condition, and 
regulatory compliance matters--could have a substantial impact on the 
way those members engage in the securities business and comply with the 
federal securities laws.\68\ In our view, any such entity should be 
subject to full Commission oversight to assure its performance of such 
functions is consistent with the protection of investors and the public 
interest. For these additional reasons, in the exercise of our 
discretion under Section 5 of the Act, we would deny the exemption 
application.
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    \67\ See William O. Douglas, Democracy and Finance 82 (1940).
    \68\ See, e.g., Securities Industry Study, Report of the 
Subcommittee on Securities, Committee on Banking, Housing, and Urban 
Affairs, U.S. Senate, 93rd Cong., at 14 (1973) (``The broad powers 
delegated to the exchanges and the NASD under the Exchange Act 
include the power to affect the interests of individuals and firms, 
both members and non-members.'').
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    Our conclusion today is not inconsistent with prior Commission 
practice. At the outset, we think it is important to observe that the 
Commission has rarely exercised its exemptive authority under Section 
5--indeed, it has granted a limited volume exemption, as sought by AMSE 
here, on only two prior occasions in the past 79 years.\69\ And while 
the Commission imposed certain conditions upon exemptions from exchange 
registration when it granted them, the exemptions and conditions 
thereto neither allowed nor required the exercise of the extensive SRO 
authority that AMSE is seeking.\70\ Moreover, although the Commission 
acknowledged in the Regulation ATS Adopting Release that an exemption 
under Section 5 could be available for an exchange that has self-
regulatory attributes,\71\ the Commission has never granted an 
exemption to an exchange seeking to carry out the broad range of self-
regulatory functions performed by registered SROs, as proposed by 
AMSE.\72\ Rather, the Commission has granted an exemption only once to 
an exchange with ``self-regulatory attributes'' \73\ and, in that case, 
the exchange sought only to impose financial and operational standards 
as a condition for eligibility

[[Page 34770]]

for trading.\74\ The limited self-regulatory attributes in that case 
stand in stark contrast to the full scope of self-regulatory powers 
sought by AMSE here.
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    \69\ In 1991, the Commission issued a limited volume exemption 
from exchange registration for Wunsch Auction Systems, Inc. 
(``WASI'') (now known as ``Arizona Stock Exchange''). See Securities 
Exchange Act Release No. 28899 (February 20, 1991), 56 FR 
8377(February 28, 1991) (``WASI Order''). WASI proposed to operate 
an auction trading system for after-hours trading three times a 
week, at a half an hour each. In 1999, the Commission issued a 
limited volume exemption from exchange registration for Tradepoint 
Financial Networks plc (``Tradepoint'') (now known as ``Swiss 
Exchange''). See Securities Exchange Act Release No. 41199 (March 
22, 1999), 64 FR 14953 (March 29, 1999). Tradepoint operated as a 
U.K.-registered trading facility and offered trading only in 
securities listed on the London Stock Exchange. Aside from these two 
exemptions, the Commission has only issued limited volume exemptions 
under Section 5 of the Act in the period from 1935 to1936; the 
exemptions issued then were for a small group of municipally-based 
securities exchanges that were already in existence at the time of 
the initial adoption of the Act in 1934. See Securities Exchange Act 
Release No. 416, November 14, 1935 (exempting the Honolulu Stock 
Exchange, the Milwaukee Grain and Stock Exchange, and Minneapolis-
St. Paul Stock Exchange); Securities Exchange Act Release No. 432, 
December 2, 1935 (exempting the Richmond Stock Exchange and Wheeling 
Stock Exchange); Securities Exchange Act Release No. 472, February 
3, 1936 (exempting the Colorado Springs Stock Exchange); Securities 
Exchange Act Release No. 589, April 10, 1936 (exempting the Seattle 
Stock Exchange).
    \70\ See Securities Exchange Act Release No. 416, November 14, 
1935 (requiring the Honolulu Stock Exchange, the Milwaukee Grain and 
Stock Exchange, and the Minneapolis-St. Paul Stock Exchange to keep 
up-to-date and available to the public the data contained in the 
application for exemption, make and keep required records, provide 
reports as necessary, and provide in their rules that a willful 
violation of any of the exemption conditions shall be inconsistent 
with just and equitable principles of trade, and providing that the 
same restrictions with regard to the extension of credit for 
registered securities are imposed on securities listed on these 
exchanges, that members of the exchanges are subject to Commission-
imposed financial responsibility rules and regulations, that the 
manipulation provisions of the Securities Exchange Act apply to the 
exchanges and their members, and that companies whose securities are 
listed on the exchanges are required to file with the exchange and 
Commission certain annual financial statements); Securities Exchange 
Act Release No. 432, December 2, 1935 (granting exemptions for the 
Richmond Stock Exchange and the Wheeling Stock Exchange upon the 
same conditions imposed on the exchanges in Securities Exchange Act 
Release No. 416); Securities Exchange Act Release No. 472, February 
3, 1936 (granting an exemption to the Colorado Springs Stock 
Exchange upon the same conditions imposed on the exchanges in 
Securities Exchange Act Release Nos. 416 and 432); Securities 
Exchange Act Release No. 589, April 10, 1936 (granting an exemption 
to the Seattle Stock Exchange upon the same conditions imposed on 
the exchanges in Securities Exchange Act Release Nos. 416, 432, and 
472); WASI Order (granting an exemption based on the condition that 
WASI (1) permit the Commission to conduct examinations; (2) comply 
with its agreement to report volume and price data to the Commission 
and to SROs, and provide other information (such as the identities 
of participants who have entered orders) to the Commission and the 
SROs upon request; (3) comply with its undertaking to implement 
procedures to conduct surveillance of its employees and adopt 
requirements to ensure the non-disclosure of confidential 
information; (4) suspend trading in any security subject to a 
regulatory halt for pending news called by the primary market for 
the security or during suspensions of trading ordered by the 
Commission pursuant to Section 12(k) of the Act, and consult with 
the Commission subsequent to an exchange or NASDAQ session in which 
an operational trading halt has occurred or a circuit breaker has 
gone into effect; (5) suspend any auction at the request of the 
Commission, assuming adequate notice is given, and (6) continue to 
comply with the capacity, security, and contingency planning 
guidelines contained in the Commission's Automation Review Policy).
    \71\ In the Regulation ATS Adopting Release, the Commission 
stated that it ``believes that the low volume exemption continues to 
be appropriate for some exchanges, such as an exchange that, for 
example, disciplines its members (other than by excluding them or 
limiting them from trading based on objective criteria, such as 
creditworthiness), or has other self-regulatory attributes that 
exclude it from the definition of alternative trading system.'' See 
Regulation ATS Adopting Release, 63 FR at 70848, note 33.
    \72\ See supra notes 31-46 and accompanying text.
    \73\ The Commission notes the distinction between entities that 
display ``self-regulatory attributes''--which implies having only a 
few features of an SRO, such as disciplining members for violations 
of its own rules--and entities seeking to exercise all or nearly all 
of the powers of SROs under the Act. As discussed above, AMSE's 
application shows that it is not proposing merely to have a few 
self-regulatory attributes, but rather seeks to exercise the full 
range of powers available to SROs under the Act. See supra notes 31-
46 and accompanying text. Under these conditions, the Commission 
continues to believe, as previously stated, that the SRO functions 
can be exercised only by an SRO, not an exempt exchange.
    \74\ See Securities Exchange Act Release No. 41199 (March 22, 
1999), 64 FR 14953 (March 29, 1999) (order granting a limited volume 
exemption under Section 5 of the Act to Tradepoint).
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C. AMSE Is Mistaken in Its Interpretation of the Relevant Procedural 
Requirements Relating to Its Exemption Application

    AMSE has labored under certain misunderstandings of the relevant 
procedures throughout its interactions with the staff on this matter. 
To the extent that there is any ambiguity in these procedures, we take 
this opportunity to provide clarification. AMSE erroneously reads Rule 
202.3(b)(2) of the Commission's procedural rules as establishing an 
enforceable right on the part of AMSE to require the Commission's staff 
to confer with AMSE. Rule 202.3(b)(2) provides, in relevant part:

    Applications for registration as national securities exchanges, 
or exemption from registration as exchanges by reason of such 
exchanges' limited volume of transactions filed with the Commission 
are routed to the Division of Market Regulation, which examines 
these applications to determine whether all necessary information 
has been supplied and whether all required financial statements and 
other documents have been furnished in proper form. . . . The staff 
confers with applicants and makes suggestions in appropriate cases 
for amendments and supplemental information. Where it appears 
appropriate in the public interest and where a basis therefore 
exists, denial proceedings may be instituted.

    AMSE appears to construe the second sentence in the quoted language 
above to establish a binding obligation on the Commission staff to work 
with AMSE to achieve Commission approval of its exemption application.
    But the rule contains no such requirement; indeed, it does not 
prescribe any procedure that the Commission staff must follow when 
working with applicants on applications for registration or exemption 
from registration. To the contrary, when the rule refers to Commission 
staff conferring with applicants, it is expressly descriptive, rather 
than prescriptive, as to the staff's actions. And, critically, it 
provides only that the staff will ``confer[] with applicants and make[] 
suggestions in appropriate cases . . . .'' \75\ The rule thus 
explicitly leaves it to the staff to identify the situations in which 
it would be appropriate to confer with applicants.\76\ It certainly 
does not (as AMSE appears to believe) entitle applicants to obtain 
guidance from the staff so that the applicants can repeatedly amend 
their applications before the Commission issues its final order.\77\ In 
any event, as noted above, Commission staff in fact consulted with AMSE 
and provided views and input to AMSE about its application.\78\
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    \75\ 17 CFR 202.3(b)(2) (emphasis added).
    \76\ See, e.g., Dichter-Mad Family Partners, LLP v. United 
States, 707 F.Supp.2d 1016, 1042-43 (C.D. Cal. 2010), aff'd, 709 
F.3d 749 (9th Cir. 2013) (dismissing plaintiffs' claims upon 
finding, among other things, that even though statute mandated that 
agency staff ``shall'' engage in certain conduct, such language was 
``modified by the discretionary `as appropriate''' and thus statute 
conferred discretion upon agency officials). Cf. Nat'l Env't. Dev. 
Ass'n's Clean Air Project v. EPA, 686 F.3d 803, 813 (D.C. Cir. 2012) 
(concluding that the statutory phrase ``as appropriate'' conferred 
``significant discretion'' upon the agency); Bear Valley Mut. Water 
Co. v. Salazar, No. 11-01263, 2012 WL 5353353 (C.D. Cal. Oct. 17, 
2012) (same); City of Toledo v. Beazer Materials & Servs., Inc., No. 
90-CV-7344, 1995 WL 770396 (N.D. Ohio June 14, 1995) (the same 
phrase in a federal regulation indicated that the described activity 
was ``not mandatory'').
    \77\ Nor does the rule contain any suggestion that, absent such 
a conference with the staff, the administrative record would be 
fatally deficient and any subsequent action by the Commission on the 
application would be improper.
    \78\ See supra note 6 (discussing communications between 
Commission staff and AMSE regarding AMSE's application occurring 
between December 2013 and March 2014).
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IV. Conclusion

    The Commission has reviewed AMSE's application for a limited volume 
exemption from registration as a national securities exchange and has 
determined, for the reasons described above, to deny AMSE's 
application.\79\
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    \79\ We note that, at times during the pendency of its exemption 
application, AMSE made unsubstantiated claims of bad faith on the 
staff's part. We see no indication of any bad faith, however. And in 
any event, we have reached our determination to deny AMSE's 
exemption application based on our own independent review of the 
application. Accordingly, we are confident that AMSE has had a full 
and fair opportunity to present its application to us for 
consideration and that AMSE has suffered no prejudice.
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    It is therefore ordered, pursuant to Section 5 of the Act, that 
AMSE's application for an exemption from registration as a national 
securities exchange be, and hereby is, denied.

    By the Commission.
Brent J. Fields,
Secretary.
[FR Doc. 2015-14807 Filed 6-16-15; 8:45 am]
 BILLING CODE 8011-01-P