Document ID: SEC-2007-0331-0001
Agency: sec
Document Type: Notice
Title: Securities Exchange Act: International Securities Exchange, LLC and National Association of Securities Dealers, Inc.; regulatory responsibilities allocation plan
Posted Date: 2007-03-06T05:00Z

[Federal Register: March 6, 2007 (Volume 72, Number 43)]
[Notices]               
[Page 9983-9985]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr06mr07-91]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55367; File No. 4-529]

 
Program for Allocation of Regulatory Responsibilities Pursuant to 
Rule 17d-2; Order Approving and Declaring Effective a Plan for the 
Allocation of Regulatory Responsibilities Between the International 
Securities Exchange, LLC and the National Association of Securities 
Dealers, Inc.

February 27, 2007.
    Notice is hereby given that the Securities and Exchange Commission 
(``Commission'') has issued an Order, pursuant to Sections 17(d) \1\ 
and 11A(a)(3)(B) \2\ of the Securities Exchange Act of 1934 (``Act''), 
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 \3\ by the International 
Securities Exchange, LLC (``ISE'') and the National Association of 
Securities Dealers, Inc. (``NASD'') (together with ISE, the 
``Parties'').\4\
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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.
    \4\ See Securities Exchange Act Release No. 55057 (January 8, 
2007), 72 FR 2040 (January 17, 2007) (``Notice'').
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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, ISE is relieved of 
those regulatory responsibilities allocated to NASD under the Plan.

I. Introduction

    Section 19(g)(1) of the Act,\5\ among other things, requires every 
self-regulatory organization (``SRO'') registered as either a national 
securities exchange or registered securities association to examine 
for, and enforce compliance by, its members and persons associated with 
its members with the Act, the rules and regulations thereunder, and the 
SRO's own rules, unless the SRO is relieved of this responsibility 
pursuant to Section 17(d) \6\ or 19(g)(2) \7\ of the Act. Section 
17(d)(1) of the Act \8\ was intended, in part, to eliminate unnecessary 
multiple examinations and regulatory duplication for those broker-
dealers that maintain memberships in more than one SRO (``common 
members'').\9\ 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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    \5\ 15 U.S.C. 78s(g)(1).
    \6\ 15 U.S.C. 78q(d).
    \7\ 15 U.S.C. 78s(g)(2).
    \8\ 15 U.S.C. 78q(d)(1).
    \9\ 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 \10\ and Rule 17d-2 \11\ under the Act. 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 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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    \10\ 17 CFR 240.17d-1. 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.
    \11\ 17 CFR 240.17d-2.
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    On January 17, 2007, the Commission published notice of the Plan 
filed by ISE and NASD.\12\ The Commission received no comments on the 
Plan. The Plan is intended to replace and supersede the current 17d-2 
plan between NASD and ISE and all prior amendments thereto in their 
entirety,\13\ and is intended to

[[Page 9984]]

reduce regulatory duplication for firms that are common members of ISE 
and NASD. The text of the Plan allocates regulatory responsibilities 
among the Parties with respect to common members. Included in the Plan 
is an attachment (the ``ISE Certification of Common Rules,'' referred 
to herein as the ``Certification'') that lists every ISE rule and 
federal securities law and rule and regulation thereunder for which, 
under the Plan, NASD would bear responsibility for examining, and 
enforcing compliance by, common members.
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    \12\ See Notice, supra note 4.
    \13\ The Parties currently operate pursuant to a 17d-2 plan in 
which NASD has assumed certain inspection, examination, and 
enforcement responsibility for common members with respect to 
certain applicable laws, rules, and regulations (the ``current NASD-
ISE 17d-2 plan''). See Securities Exchange Act Release Nos. 42668 
(April 11, 2000), 65 FR 21048 (April 19, 2000) (File No. 4-431) 
(notice of filing); 42815 (May 23, 2000), 65 FR 34762 (May 31, 2000) 
(File No. 4-431) (approval order).
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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 \14\ and Rule 17d-2(c) 
thereunder \15\ 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 could reduce unnecessary 
regulatory duplication by allocating to NASD certain responsibilities 
for common members that would otherwise be performed by both ISE and 
NASD. Accordingly, the proposed Plan promotes efficiency by reducing 
costs to common members. Furthermore, because ISE and NASD will 
coordinate their regulatory functions in accordance with the Plan, the 
Plan should promote investor protection.
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    \14\ 15 U.S.C. 78q(d).
    \15\ 17 CFR 240.17d-2(c).
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    The Commission notes that, under the Plan, ISE and NASD have 
allocated regulatory responsibility for all ISE rules that are 
substantially similar to NASD rules in that ISE's rule would not 
require NASD 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 (``Common Rules''). These Common Rules are specifically 
listed in the Certification. In addition, under the Plan, the 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.\16\
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    \16\ As proposed currently, however, there are no federal 
securities rules listed on the Certification. Therefore, at present, 
ISE has not been relieved of any regulatory responsibilities, 
pursuant to the Plan, for any provisions of the federal securities 
laws and the rules and regulations thereunder.
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    The Plan further provides that NASD shall not assume regulatory 
responsibility, and ISE will retain full responsibility, for: (1) 
Surveillance and enforcement with respect to trading activities or 
practices involving ISE's own marketplace; (2) registration pursuant to 
ISE's applicable rules of associated persons (i.e., registration rules 
that are not Common Rules); (3) ISE's duties as a DEA under Rule 17d-1 
of the Act;\17\ and (4) any rules of ISE that do not qualify as Common 
Rules, except that NASD shall be responsible for such rules with 
respect to any ISE member that operates as a facility, acts as an 
outbound router for ISE, and is a member of NASD (``Router 
Member'').\18\ Apparent violations of any ISE rules by any Router 
Member will be processed by NASD, and NASD will conduct any enforcement 
proceedings. The effect of these provisions is that regulatory 
oversight and enforcement responsibilities for any Router Member will 
be vested with NASD. These provisions should help avoid any potential 
conflicts of interest that could arise if ISE was primarily responsible 
for regulating its affiliated outbound router.\19\
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    \17\ 17 CFR 240.17d-1.
    \18\ Currently, ISE Route LLC is the only Router Member.
    \19\ In a separate proposed rule change relating to the adoption 
of rules to govern its electronic trading system for equities, ISE 
represented that it would enter into a 17d-2 agreement with NASD to 
delegate to NASD all regulatory oversight and enforcement 
responsibilities with respect to the ISE's outbound routing facility 
pursuant to applicable laws (i.e., the Plan). See Securities 
Exchange Act Release No. 54528 (September 28, 2006), 71 FR 58650, 
58654 (October 4, 2006) (SR-ISE-2006-48).
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    According to the Plan, ISE will perform a review of the 
Certification, at least annually, or more frequently if required by 
changes in either the rules of ISE or NASD, to add ISE rules not 
included on the then-current list of Common Rules that are 
substantially similar to NASD rules (i.e., new rules that qualify as 
Common Rules or existing rules that have been amended so that they now 
qualify as Common Rules); delete ISE rules included in the then-current 
list of Common Rules that are no longer substantially similar to NASD 
rules (i.e., amended rules that cease to be Common Rules); and confirm 
that the remaining rules on the list of Common Rules continue to be ISE 
rules that are substantially similar to NASD rules. 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, ISE will also 
provide NASD with a current list of dual members and shall update the 
list no less frequently than once each quarter.
    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 ISE rules that are 
substantially similar to the rules of NASD for common members of ISE 
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 
ISE rules in the Certification in conformance with the definition of 
Common Rules provided in the Plan. However, should ISE or NASD decide 
to add an ISE rule to the Certification that is not substantially 
similar to an NASD rule; delete an ISE rule from the Certification that 
is substantially similar to an NASD rule; or leave on the Certification 
an ISE 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.\20\
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    \20\ The Commission also notes that the addition to (or eventual 
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, common 
members, would constitute an amendment to the Plan.
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    The Plan also permits ISE and NASD to terminate the Plan, subject 
to notice, for various reasons. 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.\21\
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    \21\ The Commission notes that paragraphs 4 and 13 of the Plan 
reflect 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. 4-529. 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. 4-529, between ISE 
and NASD, filed pursuant to Rule 17d-2 under the Act, is approved and 
declared effective.

[[Page 9985]]

    It is therefore ordered that ISE is relieved of those 
responsibilities allocated to the NASD under the Plan in File No. 4-
529.
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    \22\ 17 CFR 200.30-3(a)(34).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\22\
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-3837 Filed 3-5-07; 8:45 am]

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