Document ID: SEC-2008-1283-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: American Stock Exchange LLC, et al.
Posted Date: 2008-09-22T04:00Z

[Federal Register: September 22, 2008 (Volume 73, Number 184)]
[Notices]               
[Page 54646-54648]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr22se08-92]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58536; File No. 4-566]

 
Program for Allocation of Regulatory Responsibilities Pursuant to 
Rule 17d-2; Order Approving and Declaring Effective a Plan for the 
Allocation of Regulatory Responsibilities Among the American Stock 
Exchange LLC, Boston Stock Exchange, Inc., CBOE Stock Exchange, LLC, 
Chicago Stock Exchange, Inc., Financial Industry Regulatory Authority, 
Inc., International Securities Exchange, LLC, The NASDAQ Stock Market 
LLC, National Stock Exchange, Inc., New York Stock Exchange, LLC, NYSE 
Arca Inc., NYSE Regulation, Inc., and Philadelphia Stock Exchange, Inc.

September 12, 2008.
    On August 12, 2008, the American Stock Exchange LLC (``Amex''), 
Boston Stock Exchange, Inc. (``BSE''), CBOE Stock Exchange, LLC 
(``CBOE''), Chicago Stock Exchange, Inc. (``CHX''), Financial Industry 
Regulatory Authority, Inc. (``FINRA''), International Securities 
Exchange, LLC (``ISE''), The NASDAQ Stock Market, LLC (``NASDAQ''), 
National Stock Exchange, Inc. (``NSX''), New York Stock Exchange LLC 
(``NYSE''), NYSE Arca Inc. (``NYSE Arca''), NYSE Regulation, Inc. 
(acting under authority delegated to it by NYSE) (``NYSE Regulation''), 
and Philadelphia Stock Exchange, Inc. (``Phlx'') (collectively, 
``Participating Organizations'' or ``Parties'') filed with the 
Securities and Exchange Commission (``Commission''), pursuant to 
Section 17(d) of the Securities Exchange Act of 1934 (``Act''),\1\ and 
Rule 17d-2 thereunder,\2\ a proposed plan for the allocation of 
regulatory responsibilities (``Plan''). The Plan was published for 
comment on August 18, 2008.\3\ The Commission received no comments on 
the Plan. This order approves and declares effective the 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. 58350 (August 13, 
2008), 73 FR 48248 (File No. 4-566) (``Notice'').
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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) \5\ or Section 19(g)(2) \6\ of the Act.
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    \4\ 15 U.S.C. 78s(g)(1).
    \5\ 15 U.S.C. 78q(d).
    \6\ 15 U.S.C. 78s(g)(2).
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    Section 17(d)(1) of the Act \7\ 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'').\8\ 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

[[Page 54647]]

perform other specified regulatory functions.
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    \7\ 15 U.S.C. 78q(d)(1).
    \8\ 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.\9\ 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.\10\ 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 broker dealers' 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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    \9\ 17 CFR 240.17d-1 and 17 CFR 240.17d-2, respectively.
    \10\ 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.\11\ 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 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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    \11\ See Securities Exchange Act Release No. 12935 (October 28, 
1976), 41 FR 49091 (November 8, 1976).
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II. The Plan

    The proposed Plan is designed to eliminate regulatory duplication 
by allocating regulatory responsibility over Common NYSE Members \12\ 
or Common FINRA Members,\13\ as applicable, (collectively, ``Common 
Members'') for the surveillance, investigation, and enforcement of 
common insider trading rules (``Common Rules'').\14\ The Plan assigns 
regulatory responsibility over Common NYSE Members to NYSE Regulation 
for surveillance, investigation, and enforcement of insider trading by 
broker-dealers, and their associated persons, with respect to NYSE-
listed stocks and NYSE Arca-listed stocks, irrespective of the 
marketplace(s) maintained by the Participating Organizations on which 
the relevant trading may occur. The Plan assigns regulatory 
responsibility over Common FINRA Members to FINRA for surveillance, 
investigation, and enforcement of insider trading by broker-dealers, 
and their associated persons, with respect to NASDAQ-listed stocks and 
Amex-listed stocks, as well as any CHX solely-listed stock, 
irrespective of the marketplace(s) maintained by the Participating 
Organizations on which the relevant trading may occur. The full text of 
the Plan and Exhibits A, B, and C thereto can be found in the Notice.
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    \12\ Common NYSE Members include members of the NYSE and at 
least one of the Participating Organizations.
    \13\ Common FINRA Members are members of FINRA and at least one 
of the Participating Organizations.
    \14\ Common Rules are defined as: (i) Federal securities laws 
and rules promulgated by the Commission pertaining to insider 
trading, and (ii) the rules of the Participating Organizations that 
are related to insider trading. See Exhibit A to the Plan.
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    In addition to the Plan, the Participating Organizations have 
entered into two regulatory services agreements that address 
investigation and enforcement in situations that involve trading in 
equity securities by non-Common Members, as Rule 17d-2 covers only 
situations involving Common Members. The first agreement is between 
NYSE Regulation (acting as the regulatory services provider), FINRA, 
and each of the exchanges (``NYSE Regulation Agreement''). The second 
agreement is between FINRA (acting as the regulatory services 
provider), NYSE Regulation, and each of the exchanges (``FINRA 
Agreement''). The agreements provide for the investigation and 
enforcement of suspected insider trading against broker-dealers and 
their associated persons that (i) are not Common Members of NYSE in the 
case of insider trading in NYSE-listed stocks and NYSE-Arca listed 
stocks; or (ii) are not Common Members of FINRA in the case of insider 
trading in NASDAQ-listed stocks, Amex-listed stocks, and any CHX 
solely-listed stock.
    Under the agreements, NYSE Regulation and FINRA, respectively, will 
provide to the exchanges ``Core Services'' related and limited to the 
investigation and enforcement activities for non-Common Members where 
these activities relate to insider trading of equity securities listed 
on the NYSE or NYSE Arca in the case of the NYSE Regulation Agreement, 
and to the insider trading of equity securities listed on the Nasdaq or 
Amex, and any CHX solely-listed security in the case of the FINRA 
Agreement. The Core Services provided under the agreements are rendered 
(a) only upon completion of a surveillance review under the 17d-2 Plan, 
and (b) at the request of the relevant exchange. Pursuant to the Plan, 
NYSE Regulation and FINRA will conduct surveillance, investigation, and 
enforcement for insider trading for Common NYSE Members and Common 
FINRA Members, respectively. Surveillance for non-Common Members is 
excluded from the Plan and remains the responsibility of the SROs in 
which such non-Common Members maintain membership. However, due to the 
nature of insider trading surveillance technology and processes, the 
surveillance conducted by NYSE Regulation and FINRA will encompass non-
Common Members as the surveillance function does not differentiate 
between Common and non-Common Members. Accordingly, the investigation 
and enforcement services performed under the agreements will arise from 
surveillance undertaken by NYSE Regulation and FINRA.

III. 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 
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 should reduce 
unnecessary regulatory duplication by allocating regulatory 
responsibility for the surveillance, investigation, and enforcement of 
Common Rules over Common NYSE Members, with respect to NYSE-listed 
stocks and NYSE Arca-listed stocks, to NYSE and over Common FINRA 
Members, with respect to NASDAQ-listed stocks, Amex-listed stocks, and 
any CHX solely-listed stock,

[[Page 54648]]

to FINRA. Accordingly, the proposed Plan promotes efficiency by 
consolidating these regulatory functions in a single SRO based on the 
listing market for a stock, with regard to Common NYSE Members and 
Common FINRA Members.
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    \15\ 15 U.S.C. 78q(d).
    \16\ 17 CFR 240.17d-2.
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    In addition, the Commission notes that the Plan provides that the 
costs for insider trading surveillance would be shared among the 
Participating Organizations based on their relative trade volume, 
subject to certain minimum payment amounts for smaller markets. 
Modifications to the fees assessed the Participating Organizations 
pursuant to the cost allocation methodologies established in the Plan 
do not require an amendment to the Plan; however, any modifications to 
the cost allocation methodologies would require approval by the 
Commission. The Commission believes that the Plan provides a reasonable 
method to allocate among the Parties expenses reasonably incurred by 
the SRO having regulatory responsibilities under the Plan.\17\
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    \17\ 17 CFR 240.17d-2(b).
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    The Commission also notes that because under Rule 17d-2 regulatory 
responsibility may be allocated from one SRO to another SRO only for 
Common Members, the Participating Organizations have entered into two 
regulatory services agreements with NYSE Regulation and FINRA, 
respectively, to address investigation and enforcement of suspected 
insider trading involving members who are neither Common NYSE Members 
nor Common FINRA Members.\18\ The Commission is neither approving nor 
disapproving the terms of the regulatory services agreements. However, 
the Commission does note that under these regulatory services 
agreements the ultimate responsibility and primary liability for self-
regulatory obligations would remain with each exchange and association, 
rather than the SRO retained to perform such functions.
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    \18\ Members only of the NYSE would be the responsibility of 
NYSE; members only of FINRA would be the responsibility of FINRA.
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IV. Conclusion

    This Order gives effect to the Plan filed with the Commission in 
File No. 4-566. 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,\19\ 
that the Plan in File No. 4-566 by and among Amex, BSE, CBOE, CHX, 
FINRA, ISE, NASDAQ, NSX, NYSE, NYSE Arca, NYSE Regulation, and Phlx 
filed pursuant to Rule 17d-2 is hereby approved and declared effective.
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    \19\ 15 U.S.C. 78q(d).
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    It is further ordered that the Participating Organizations are 
relieved of those regulatory responsibilities allocated to NYSE and 
FINRA under the Plan in File No. 4-566.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(34).
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Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-22013 Filed 9-19-08; 8:45 am]

BILLING CODE 8010-01-P