Document ID: SEC-2010-1404-0001
Agency: sec
Document Type: Notice
Title: Approval of Allocation of Regulatory Responsibilities: Financial Industry Regulatory Authority, Inc. and the Chicago Stock Exchange,Inc.
Posted Date: 2010-09-14T04:00Z

[Federal Register: September 14, 2010 (Volume 75, Number 177)]
[Notices]               
[Page 55833-55835]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr14se10-114]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-62866; File No. 4-274]

 
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 Financial 
Industry Regulatory Authority, Inc. and the Chicago Stock Exchange, 
Inc.

September 8, 2010.
    On July 21, 2010, the Financial Industry Regulatory Authority, Inc. 
(``FINRA'') and the Chicago Stock Exchange, Inc. (``CHX'') (together 
with FINRA, the ``Parties'') filed with the Securities and Exchange 
Commission (``Commission'' or ``SEC''), pursuant to Section 17(d) of 
the Securities Exchange Act of 1934 (``Act''),\1\ and Rule 17d-2 
thereunder,\2\ an amendment to their September 16, 1977 Agreement 
Between the National Association of Securities Dealers, Inc. (n/k/a 
FINRA) and the Midwest Stock Exchange Incorporated (n/k/a CHX) (``17d-2 
Plan'' or the ``Plan'') for the allocation of regulatory 
responsibilities. The proposed amended Plan was published for comment 
on August 12, 2010.\3\ The Commission received no comments on the 
amended Plan. This order approves and declares effective the amended 
Plan.
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    \1\ 15 U.S.C. 78q(d).
    \2\ 17 CFR 240.17d-2.
    \3\ See Securities Exchange Act Release No. 62657 (August 5, 
2010), 75 FR 49005 (August 12, 2010).
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I. Introduction

    Section 19(g)(1) of the Act,\4\ among other things, requires every 
self-regulatory organization (``SRO'') registered as either a national 
securities exchange or national 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 Section 19(g)(2) of the Act.\5\ Without 
this relief, the statutory obligation of each individual SRO could 
result in a pattern of multiple examinations of broker-dealers that 
maintain memberships in more than one SRO (``common members''). Such 
regulatory duplication would add unnecessary expenses for common 
members and their SROs.
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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.
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    Section 17(d)(1) of the Act \6\ was intended, in part, to eliminate 
unnecessary multiple examinations and regulatory duplication.\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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    \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

[[Page 55834]]

17d-1 and Rule 17d-2 under the Act.\8\ 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.\9\ When an SRO has been named as a common member's DEA, all 
other SROs to which the common member belongs are relieved of the 
responsibility to examine the firm for compliance with the applicable 
financial responsibility rules. On its face, Rule 17d-1 deals only with 
an SRO's obligations to enforce member compliance with financial 
responsibility requirements. Rule 17d-1 does not relieve an SRO from 
its obligation to examine a common member for compliance with its own 
rules and provisions of the federal securities laws governing matters 
other than financial responsibility, including sales practices and 
trading activities and practices.
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    \8\ 17 CFR 240.17d-1 and 17 CFR 240.17d-2, respectively.
    \9\ See Securities Exchange Act Release No. 12352 (April 20, 
1976), 41 FR 18808 (May 7, 1976).
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    To address regulatory duplication in these and other areas, the 
Commission adopted Rule 17d-2 under the Act.\10\ Rule 17d-2 permits 
SROs to propose joint plans for the allocation of regulatory 
responsibilities 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 appropriate 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. Commission approval of a plan filed pursuant to Rule 17d-2 
relieves an SRO of those regulatory responsibilities allocated by the 
plan to another SRO.
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    \10\ See Securities Exchange Act Release No. 12935 (October 28, 
1976), 41 FR 49091 (November 8, 1976).
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II. The Plan

    On September 26, 1978, the Commission approved the Plan allocating 
regulatory responsibilities pursuant to Rule 17d-2 on a provisional 
basis.\11\ Under the Plan, FINRA was responsible, in part, for 
conducting on-site examinations of each dual member for which it was 
the DEA. On February 20, 1980, the Commission noticed for comment an 
amendment to the Plan, which provided, in part, for the handling of 
customer complaints, the review of dual members' advertising, and the 
arbitration of disputes under the Plan.\12\ On May 30, 1980, the 
Commission approved the Plan, as amended.\13\
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    \11\ See Securities Exchange Act Release No. 15191 (September 
26, 1978), 43 FR 46093 (October 5, 1978).
    \12\ See Securities Exchange Act Release No. 16591 (February 20, 
1980), 45 FR 12573 (February 26, 1980).
    \13\ See Securities Exchange Act Release No. 16858 (May 30, 
1980), 45 FR 37927 (June 5, 1980).
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III. Proposed Amendment to the Plan

    The proposed 17d-2 Plan is intended to reduce regulatory 
duplication for firms that are common members \14\ of both CHX and 
FINRA. Pursuant to the proposed 17d-2 Plan, FINRA would assume certain 
examination and enforcement responsibilities for common members with 
respect to certain applicable laws, rules, and regulations. The amended 
agreement would replace the previous Plan in its entirety.
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    \14\ The proposed 17d-2 Plan refers to these members as ``Dual 
Members.'' See Paragraph 1(c) of the proposed 17d-2 Plan.
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    The text of the proposed Plan delineates the proposed regulatory 
responsibilities with respect to the Parties. Included in the proposed 
Plan is an exhibit (the ``CHX Certification of Common Rules'' referred 
to herein as the ``Certification'') that lists every CHX rule, and 
select federal securities laws, rules, and regulations, for which FINRA 
would bear responsibility under the proposed Plan for examining and 
enforcing with respect to CHX members that are also members of FINRA 
and the associated persons therewith (``Dual Members'').
    Specifically, under the proposed 17d-2 Plan, FINRA would assume 
examination and enforcement responsibility relating to compliance by 
Dual Members with the rules of CHX that are substantially similar to 
the applicable rules of FINRA, as well as certain provisions of the 
federal securities laws and the rules and regulations thereunder 
delineated in the Certification (``Common Rules'').\15\ Common Rules 
would not include the application of any CHX rule or FINRA rule, or any 
rule or regulation under the Act, to the extent that it pertains to 
violations of insider trading activities, because such matters are 
covered by a separate multiparty agreement pursuant to Rule 17d-2.\16\ 
In the event that a Dual Member is the subject of an investigation 
relating to a transaction on CHX, the plan acknowledges that CHX may, 
in its discretion, exercise concurrent jurisdiction and responsibility 
for such matter.\17\
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    \15\ See paragraph 1(b) of the proposed 17d-2 Plan (defining 
Common Rules). See also paragraph 1(f) of the proposed 17d-2 Plan 
(defining Regulatory Responsibilities).
    \16\ See Securities Exchange Act Release No. 61919 (April 15, 
2010), 75 FR 21051 (April 22, 2010) (File No. 4-566) (notice of 
filing and order approving and declaring effective the plan).
    \17\ See paragraph 6 of the proposed 17d-2 Plan.
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    Under the proposed Plan, CHX would retain full responsibility for 
surveillance, examination, investigation, and enforcement with respect 
to trading activities or practices involving CHX's own marketplace; 
registration pursuant to its applicable rules of associated persons 
(i.e., registration rules that are not Common Rules); its duties and 
obligations as a DEA pursuant to Rule 17d-1 under the Act; and any CHX 
rules that are not Common Rules.\18\
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    \18\ See paragraph 2 of the proposed 17d-2 Plan.
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IV. Discussion

    The Commission finds that the proposed Plan is consistent with the 
factors set forth in Section 17(d) of the Act \19\ and Rule 17d-2(c) 
thereunder \20\ 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 FINRA certain 
examination and enforcement responsibilities for Dual Members that 
would otherwise be performed by both CHX and FINRA. Accordingly, the 
proposed Plan promotes efficiency by reducing costs to Dual Members. 
Furthermore, because CHX and FINRA will coordinate their regulatory 
functions in accordance with the proposed Plan, the Plan should promote 
investor protection.
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    \19\ 15 U.S.C. 78q(d).
    \20\ 17 CFR 240.17d-2(c).
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    The Commission notes that, under the proposed Plan, CHX and FINRA 
have allocated regulatory responsibility for those CHX rules, set forth 
on the Certification, that are substantially similar to the applicable 
FINRA rules in that examination for compliance with such provisions and 
rules would not require FINRA to develop one or more new examination 
standards, modules, procedures, or criteria in order to analyze the 
application of the rule, or a Dual Member's activity, conduct, or 
output in relation to such rule. In addition, under the proposed Plan,

[[Page 55835]]

FINRA would assume regulatory responsibility for certain provisions of 
the federal securities laws and the rules and regulations thereunder 
that are set forth in the Certification. The Common Rules covered by 
the proposed Plan are specifically listed in the Certification, as may 
be amended by the Parties from time to time pursuant to the terms and 
conditions specified in the Plan.
    According to the proposed Plan, CHX will review the Certification, 
at least annually, or more frequently if required by changes in either 
the rules of CHX or FINRA, and, if necessary, submit to FINRA an 
updated list of Common Rules to add CHX rules not included on the then-
current list of Common Rules that are substantially similar to FINRA 
rules; delete CHX rules included in the then-current list of Common 
Rules that are no longer substantially similar to FINRA rules; and 
confirm that the remaining rules on the list of Common Rules continue 
to be CHX rules that are substantially similar to FINRA rules.\21\ 
FINRA will then confirm in writing whether the rules listed in any 
updated list are Common Rules as defined in the proposed Plan. Under 
the proposed Plan, CHX will also provide FINRA with a current list of 
Dual Members and shall update the list no less frequently than once 
each quarter.\22\
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    \21\ See paragraph 2 of the proposed 17d-2 Plan.
    \22\ See paragraph 3 of the proposed 17d-2 Plan.
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    Under the proposed Plan, CHX would retain full responsibility for 
surveillance, examination, investigation, and enforcement with respect 
to trading activities or practices involving CHX's own marketplace; 
registration pursuant to its applicable rules of associated persons 
(i.e., registration rules that are not Common Rules); its duties as a 
DEA pursuant to Rule 17d-1 under the Act; and any CHX rules that are 
not Common Rules.
    The Commission is hereby declaring effective a plan that, among 
other things, allocates regulatory responsibility to FINRA for the 
oversight and enforcement of CHX rules that are substantially similar 
to the rules of FINRA for Dual Members of CHX and FINRA. 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 CHX rules in 
the Certification in conformance with the definition of Common Rules 
provided in the Plan. However, should the Parties decide to add a CHX 
rule to the Certification that is not substantially similar to a FINRA 
rule; delete a CHX rule from the Certification that is substantially 
similar to a FINRA rule; or leave on the Certification a CHX rule that 
is no longer substantially similar to a FINRA 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.\23\
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    \23\ The Commission also notes that the addition to or deletion 
from the Certification of any federal securities laws, rules, and 
regulations for which FINRA 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 CHX and FINRA to terminate the Plan, subject 
to notice.\24\ 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.\25\
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    \24\ See paragraph 12 of the proposed 17d-2 Plan.
    \25\ The Commission notes that paragraph 12 of the Plan reflects 
the fact that FINRA's responsibilities under the Plan will continue 
in effect until the Commission approves any termination of the Plan.
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IV. Conclusion

    This Order gives effect to the Plan filed with the Commission in 
File No. 4-274. The Parties shall notify all members affected by the 
Plan of their rights and obligations under the Plan.
    It is therefore ordered, pursuant to Section 17(d) of the Act, that 
the Plan in File No. 4-274, between FINRA and CHX, filed pursuant to 
Rule 17d-2 under the Act, is approved and declared effective.
    It is therefore ordered that CHX is relieved of those 
responsibilities allocated to FINRA under the Plan in File No. 4-274.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\26\
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    \26\ 17 CFR 200.30-3(a)(34).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2010-22837 Filed 9-13-10; 8:45 am]
BILLING CODE 8010-01-P