Document ID: SEC-2007-0709-0001
Agency: sec
Document Type: Notice
Title: Regulatory responsibilities allocation plan: Chicago Board Options Exchange, Inc., et al.
Posted Date: 2007-05-18T04:00Z

[Federal Register: May 18, 2007 (Volume 72, Number 96)]
[Notices]               
[Page 28087-28089]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr18my07-124]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55755; File No. 4-536]

 
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 Chicago Board 
Options Exchange, Incorporated and the National Association of 
Securities Dealers, Inc.

 May 14, 2007.
    Notice is hereby given that the Securities and Exchange Commission 
(``Commission'') has issued an Order, pursuant to Sections 17(d) and 
11A(a)(3)(B) of the Securities Exchange Act of 1934 (``Act''),\1\ 
granting approval and declaring effective an amended and restated plan 
for the allocation of regulatory responsibilities (``Plan'') that was 
filed pursuant to Rule 17d-2 under the Act \2\ by the Chicago Board 
Options Exchange, Incorporated (``CBOE'') and the National Association 
of Securities Dealers, Inc. (``NASD'') (together with CBOE, the 
``Parties'') with respect to the CBOE Stock Exchange, LLC (``CBSX''), 
which is a facility of CBOE featuring a fully-automated marketplace for 
trading of non-option securities by CBOE members.\3\
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    \1\ 15 U.S.C. 78q(d) and 15 U.S.C. 78k-1(a)(3)(B), respectively.
    \2\ 17 CFR 240.17d-2.
    \3\ See Securities Exchange Act Release No. 55612 (April 10, 
2007), 72 FR 19556 (April 18, 2007) (``Notice''). CBOE serves as the 
self-regulatory authority for CBSX.
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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 as they relate to the CBSX. At the same 
time, CBOE is relieved of those regulatory responsibilities allocated 
to NASD under the Plan.

I. Introduction

    Section 19(g)(1) of the Act,\4\ among other things, requires every 
self-regulatory organization (``SRO'') that is 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) or 19(g)(2) of the Act.\5\ Section 17(d)(1) 
of the Act \6\ was intended, among other things, to eliminate 
unnecessary multiple examinations and regulatory duplication for those 
broker-dealers that maintain memberships in more than one SRO (``common 
members'').\7\ 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) and 15 U.S.C. 78s(g)(2), respectively.
    \6\ 15 U.S.C. 78q(d)(1).
    \7\ See Securities Act 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 and Rule 17d-2 under the Act.\8\ Rule 17d-2 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

[[Page 28088]]

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. Rule 
17d-1 authorizes the Commission to name a single SRO as the 
designated examining authority (``DEA'') to examine common members 
for compliance with the financial responsibility requirements 
imposed by the Act, or by Commission or SRO rules.
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    On April 10, 2007, the Commission issued notice of the Plan filed 
by CBOE and NASD.\9\ The Commission received no comments on the Plan. 
The Plan is intended to reduce regulatory duplication in the 
examination of Dual Members \10\ and in the filing and processing of 
certain registration and membership records as it relates to the CBSX 
by allocating to NASD certain examination and enforcement 
responsibilities with respect to CBSX. Included in the Plan is an 
attachment (the ``CBOE Certification of Common Rules,'' referred to 
herein as the ``Certification'') that lists every CBOE rule applicable 
to CBSX,\11\ and any federal securities law, rule, or regulation for 
which, under the Plan, NASD would bear responsibility for examining, 
and enforcing compliance by, common members.
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    \9\ See Notice, supra note 3.
    \10\ See Section 1(c) of the Plan (defining Dual Member as 
``those CBOE members that are also members of NASD and the persons 
associated therewith'').
    \11\ As noted in the Certification, to the extent that any CBOE 
rule listed on the Certification makes reference to options, such 
rule shall be read to apply to equity securities as provided by CBOE 
Rule 53.6.
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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 \12\ and Rule 17d-2(c) 
thereunder \13\ 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. In particular, 
the Commission believes that the proposed Plan should reduce 
unnecessary regulatory duplication by allocating to NASD certain 
responsibilities for common members that would otherwise be performed 
by both CBOE and NASD. Accordingly, the proposed Plan promotes 
efficiency by reducing costs to common members. Furthermore, because 
CBOE 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).
    \13\ 17 CFR 240.17d-2(c).
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    The Commission notes that, under the Plan, CBOE and NASD have 
allocated regulatory responsibility for those CBOE governing the 
operation of CBSX that are substantially similar to NASD rules in that 
examination for compliance with each applicable CBOE rule would not 
require NASD to develop one or more new examination standards, modules, 
procedures, or criteria to analyze the application of the rule, or a 
Dual Member's activity, conduct, or output in relation to such rule 
(``Common Rules''). The Common Rules covered by the Plan are 
specifically listed in the Certification, as may be amended by the 
Parties from time to time.\14\ In addition, under the Plan, NASD would 
assume regulatory responsibility for any provisions of the federal 
securities laws and the rules and regulations thereunder that are set 
forth in the Certification.
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    \14\ CBOE has represented that, with respect to CBSX, there are 
no CBOE rules that are substantially similar to NASD rules that are 
within the scope of the Plan but not included in the Certification. 
See Telephone call between Richard Holley III, Special Counsel, 
Division of Market Regulation, Commission, and Lawrence J. 
Bresnahan, Vice President, Member Firm Regulation, CBOE, on May 11, 
2007.
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    The Plan further provides that NASD shall not assume regulatory 
responsibility, and CBOE will retain full responsibility, for: (1) 
Surveillance and enforcement with respect to trading activities or 
practices involving CBOE's own marketplace, including without 
limitation CBOE's rules relating to the rights and obligations of 
market makers; (2) registration pursuant to CBOE's applicable rules of 
associated persons (i.e., registration rules that are not Common 
Rules); (3) CBOE's duties as a DEA under Rule 17d-1 of the Act;\15\ and 
(4) any rules of CBOE that do not qualify as Common Rules.
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    \15\ 17 CFR 240.17d-1.
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    According to the Plan, CBOE will review the Certification, at least 
annually, or more frequently if required by changes in either the rules 
of CBOE or NASD, and, if necessary, submit to NASD an updated list of 
Common Rules to add CBOE rules not included on the then-current list of 
Common Rules that are substantially similar to NASD rules; delete CBOE 
rules included in the then-current list of Common Rules that are no 
longer substantially similar to NASD rules; and confirm that the 
remaining rules on the list of Common Rules continue to be CBOE rules 
that are substantially similar to NASD rules.\16\ NASD will then 
confirm in writing whether the rules listed in any updated list are 
Common Rules as defined in the Plan. Under the Plan, CBOE will also 
provide NASD with a current list of dual members and shall update the 
list no less frequently than once each quarter.\17\
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    \16\ See Section 2 of the Plan.
    \17\ See Section 3 of the Plan.
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    The Commission is hereby declaring effective and approving a plan 
that, among other things, allocates regulatory responsibility to NASD 
for the oversight and enforcement of all CBOE rules applicable to CBSX 
that are substantially similar to the rules of NASD for Dual Members of 
CBOE and NASD. Therefore, modifications to the 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 
CBOE rules in the Certification in conformance with the definition of 
Common Rules provided in the Plan. However, should the Parties decide 
to add a CBOE rule to the Certification that is not substantially 
similar to an NASD rule; delete a CBOE rule from the Certification that 
is substantially similar to an NASD rule; or leave on the Certification 
a CBOE rule that is no longer substantially similar to an NASD rule, 
then such a change would constitute an amendment to the Plan, which 
must be filed with the Commission pursuant to Rule 17d-2 under the Act 
and noticed for public comment.\18\
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    \18\ The Commission also notes that the addition to or deletion 
from the Certification of any federal securities laws, rules, and 
regulations for which NASD would bear responsibility under the Plan 
for examining, and enforcing compliance by, Dual Members, also would 
constitute an amendment to the Plan.
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    The Plan also permits CBOE and NASD to terminate the Plan, subject 
to notice. The Commission notes, however, that while the Plan permits 
the Parties to terminate the Plan, the Parties cannot by themselves 
reallocate the regulatory responsibilities set forth in the Plan, since 
Rule 17d-2 under the Act requires that any allocation or re-allocation 
of regulatory responsibilities be filed with the Commission.\19\
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    \19\ The Commission notes that paragraph 13 of the Plan reflects 
the fact that NASD's responsibilities under the Plan will continue 
in effect until the Commission approves the termination of the Plan.
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III. Conclusion

    This Order gives effect to the Plan filed with the Commission in 
File No. 4-536. 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) and 
11A(a)(3)(B) of the Act, that the Plan in File No. 4-536, between CBOE 
and NASD, filed pursuant to Rule 17d-2 under the Act, is approved and 
declared effective.

[[Page 28089]]

    It is therefore ordered that CBOE is relieved of those 
responsibilities allocated to the NASD under the Plan in File No. 4-
536.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(34).
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Jill M. Peterson,
Assistant Secretary.
 [FR Doc. E7-9569 Filed 5-17-07; 8:45 am]

BILLING CODE 8010-01-P