Document ID: SEC-2006-1157-0001
Agency: sec
Document Type: Notice
Title: Securities Exchange Act:  NYSE Arca, Inc. and the National Association of Securities Dealers, Inc., regulatory responsibilities allocation plan.
Posted Date: 2006-09-07T04:00Z

[Federal Register: September 7, 2006 (Volume 71, Number 173)]
[Notices]               
[Page 52827-52829]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr07se06-94]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54394; File No. 4-523]

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

August 31, 2006.
    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 a revised amended and 
restated plan for the allocation of regulatory responsibilities 
(``Plan'') \3\ that was filed pursuant to Rule 17d-2 under the Act \4\ 
by NYSE Arca, Inc.\5\ (``NYSE Arca'') and the National Association of 
Securities Dealers, Inc. (``NASD'') (together with the NYSE Arca, the 
``Parties'').
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    \1\ 15 U.S.C. 78q(d).
    \2\ 15 U.S.C. 78k-1(a)(3)(B).
    \3\ On January 20, 2006, the Parties submitted an amended and 
restated 17d-2 plan for review and approval by the Commission. On 
July 25, 2006, the Parties submitted a revised amended and restated 
plan (``Plan''), which was noticed for public comment. See infra 
note 13.
    \4\ 17 CFR 240.17d-2.
    \5\ NYSE Arca, Inc. was formerly called the Pacific Exchange, 
Inc. (``PCX''). On March 6, 2006, PCX filed with the Commission a 
proposed rule change, which was effective upon filing, to change the 
name of the PCX, as well as several other related entities, to 
reflect Archipelago Holdings, Inc.'s (``Archipelago'') recent 
acquisition of PCX and the merger of the New York Stock Exchange, 
Inc. with Archipelago. See Securities Exchange Act Release No. 53615 
(April 7, 2006), 71 FR 19226 (April 13, 2006).
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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, NYSE Arca is relieved 
of those regulatory responsibilities allocated to NASD under the Plan.

I. Introduction

    Section 19(g)(1) of the Act,\6\ 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) \7\ or 19(g)(2) \8\ of the Act. Section 
17(d)(1) of the Act \9\ 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'').\10\ 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. 78s(g)(1).
    \7\ 15 U.S.C. 78q(d).
    \8\ 15 U.S.C. 78s(g)(2).
    \9\ 15 U.S.C. 78q(d)(1).
    \10\ 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 \11\ and Rule 17d-2 under the Act.\12\ 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

[[Page 52828]]

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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    \11\ 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.
    \12\ 17 CFR 240.17d-2.
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    On August 2, 2006, the Commission published notice of the Plan 
filed by NYSE Arca and NASD.\13\ The Commission received no comments on 
the Plan. The Plan is intended to replace and supersede the current 
17d-2 plan between NASD and NYSE Arca and all prior amendments thereto 
in their entirety,\14\ and is intended to reduce regulatory duplication 
for firms that are common members of NYSE Arca 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 
(``NYSE Arca Rules Certification for 17d-2 Agreement with NASD,'' 
referred to herein as the ``Certification'') that lists every NYSE Arca 
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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    \13\ See Securities Exchange Act Release No. 54224 (July 27, 
2006), 71 FR 43823.
    \14\ The Parties currently operate pursuant to a 17d-2 plan in 
which the NASD assumed certain inspection, examination, and 
enforcement responsibility for common members with respect to 
certain applicable laws, rules, and regulations (the ``current NASD-
NYSE Arca 17d-2 plan''). See Securities Exchange Act Release Nos. 
14095 (October 25, 1977), 42 FR 57198 (November 1, 1977) (File No. 
4-267) (notice of 1977 Agreement); 15191 (September 26, 1978), 43 FR 
46093 (October 5, 1978) (File No. 4-267) (order granting temporary 
approval); 15722 (April 12, 1979), 44 FR 23616 (April 20, 1979) 
(File No. 4-267) (extension of time to file amendments); 15941 (June 
21, 1979) (File No. 4-267), SEC Docket, Vol. 17, no. 14, page 995 
(July 3, 1979) (further extension of time to file required 
amendments); 16462 (January 2, 1980), 45 FR 2121 (January 10, 1980) 
(File No. 4-267) (order granting temporary approval); 16591 
(February 20, 1980), 45 FR 12573 (February 26, 1980) (File No. 4-
267) (notice of 1980 Amendment); 16719 (April 2, 1980), 45 FR 23841 
(April 8, 1980) (File No. 4-267) (order granting temporary 
approval); and 16858 (May 30, 1980), 45 FR 37927 (June 5, 1980) 
(File No. 4-267) (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 \15\ and Rule 17d-2(c) 
thereunder \16\ 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 NYSE Arca 
and NASD. Accordingly, the proposed Plan promotes efficiency by 
reducing costs to common members. Furthermore, because NYSE Arca and 
NASD will coordinate their regulatory functions in accordance with the 
Plan, the Plan should promote investor protection.
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    \15\ 15 U.S.C. 78q(d).
    \16\ 15 U.S.C. 78q(d) and 17 CFR 240.17d-2(c).
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    The Commission notes that, under the Plan, NYSE Arca and NASD have 
allocated regulatory responsibility for all NYSE Arca rules that are 
substantially similar to NASD rules in that NYSE Arca'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.\17\ In addition, 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.\18\
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    \17\ NYSE Arca has represented that there are no NYSE Arcarules 
that are substantially similar to NASD rules that are not included 
in the Certification. See Telephone call between Janet Angstadt, 
Acting General Counsel, NYSE Arca, and Richard Holley III, Special 
Counsel, Division of Market Regulation, Commission, on August 24, 
2006. Further, the Certification notes that, with respect to several 
of the NYSE Arca rules, NYSE Arca will be responsible for any 
significant difference between its rule and the comparable NASD 
rule, until such time that amendments to such rule(s) may be filed 
with and approved by the Commission. NYSE Arca has represented that 
it shortly intends to file the proposed rule changes necessary to 
conform the entirety of these rules to the corresponding NASD rules. 
See id.
    \18\ As proposed currently, there is only one Federal securities 
law rule listed on the Certification--Rule 200 of Regulation SHO, 17 
CFR 242.200.
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    The Plan further provides that NASD shall not assume regulatory 
responsibility, and NYSE Arca will retain full responsibility, for: (1) 
Surveillance and enforcement with respect to trading activities or 
practices involving NYSE Arca's own marketplace; (2) registration 
pursuant to NYSE Arca's applicable rules of associated persons (i.e., 
registration rules that are not Common Rules); (3) NYSE Arca's duties 
as a DEA under Rule 17d-1 of the Act; \19\ and (4) any rules of NYSE 
Arca that do not qualify as Common Rules, except that NASD shall be 
responsible for such rules with respect to any broker-dealer subsidiary 
of Archipelago. With respect to broker-dealer subsidiaries of 
Archipelago, apparent violations of any NYSE Arca rules by any broker-
dealer subsidiary of Archipelago 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 Archipelago Securities, L.L.C., which acts as the 
outbound router for the NYSE Arca Marketplace, will be vested with 
NASD. These provisions should help avoid any potential conflicts of 
interest that could arise if NYSE Arca was primarily responsible for 
regulating its affiliated outbound router.\20\
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    \19\ 17 CFR 240.17d-1.
    \20\ This provision was a condition in the Commission'sapproval 
of a proposed rule change submitted by the PCX (the predecessor to 
NYSE Arca) relating to the acquisition of PCX Holdings, Inc. by 
Archipelago. See Securities Exchange Act Release No. 52497 
(September 22, 2005), 70 FR 56949 (September 29, 2005) (SR-PCX-2005-
90). In that filing, PCX committed to amend the current NASD-NYSE 
Arca 17d-2 plan within 90 days of the Commission's approval of that 
filing. The 90-day requirement was subsequently extended three 
times. See Securities Exchange Act Release Nos. 52995 (December 21, 
2005), 70 FR 77232 (December 29, 2005); 53545 (March 23, 2006), 71 
FR 16183 (March 30, 2006); and 54046 (June 26, 2006), 71 FR 37965 
(July 3, 2006).
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    According to the Plan, NYSE Arca will perform a review of the 
Certification, at least annually, or more frequently if required by 
changes in either the rules of NYSE Arca or NASD, to add NYSE Arca 
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 NYSE Arca 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 NYSE Arca 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. 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 NYSE Arca rules that are substantially similar 
to the rules of the NASD for common members of NYSE Arca and

[[Page 52829]]

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 
NYSE Arca rules in the Certification in conformance with the definition 
of Common Rules provided in the Plan. However, should NYSE Arca or NASD 
decide to add a NYSE Arca rule to the Certification that is not 
substantially similar to an NASD rule; delete a NYSE Arca rule from the 
Certification that is substantially similar to an NASD rule; or leave 
on the Certification a NYSE Arca 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.
    As noted above, NYSE Arca and NASD have also set forth in the 
Certification the Federal securities laws, and the rules and 
regulations thereunder, for which NASD will bear responsibility under 
the Plan for examining, and enforcing compliance by, common members. 
The Commission notes that any changes to this list of Federal 
securities laws, and the rules and regulations thereunder, would 
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.
    The Plan also permits NYSE Arca 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 3 and 13 of thePlan 
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. 4-523. 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. 4-523, between NYSE 
Arca and NASD, filed pursuant to Rule 17d-2 under the Act, is approved 
and declared effective.
    It is therefore ordered that NYSE Arca is relieved of those 
responsibilities allocated to the NASD under the Plan in File No. 4-
523.
    For the Commission, by the Division of Market Regulation, pursuant 
to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(34).

Jill M. Peterson,
Assistant Secretary.
 [FR Doc. E6-14784 Filed 9-6-06; 8:45 am]

BILLING CODE 8010-01-P